HDI Announces Second Quarter 2022 Results

·21 min read

LANGLEY, BC, Aug. 11, 2022 /CNW/ - Hardwoods Distribution Inc. ("HDI" or the "Company") today announced financial results for the three and six months ended June 30, 2022. HDI is one of North America's largest suppliers of specialty building products to fabricators, home centers and professionals dealers servicing the repair and remodel, residential, and commercial construction end-markets. The Company currently operates a network of 86 facilities in the United States and Canada. All amounts are shown in United States dollars ("U.S. $" or "$"), unless otherwise noted.

Second Quarter Highlights

  • Second quarter sales grew 107.2% to $700.3 million, a year-over-year increase of $362.2 million. Organic sales growth in Q2 was 23.1% while acquisitions contributed an additional 84.7%.

  • Gross profit climbed 102.6%, or $77.9 million, to $153.8 million, with gross profit margin percentage of 22.0%, similar to 22.5% in the same period last year.

  • Profit per share increased significantly to $1.77, from $1.14 in Q2 2021, an increase of 54.9%.

  • Adjusted EBITDA climbed 78.6% to $78.6 million, from $44.0 million during the same period in 2021.

  • Cash flow from operating activities, before changes in working capital, per share increased by $0.25 in the second quarter to $1.79, from $1.54 in the same period last year.

  • The Board of Directors declared a quarterly dividend of C$0.12 per share, payable on October 28, 2022 to shareholders of record as at October 17, 2022.

"We delivered another quarter of outstanding financial performance as our growth strategy, proven business model and disciplined operating management, combined with favorable market conditions, helped us achieve record performance as total sales for the quarter climbed to $700.3 million," said Rob Brown, HDI's President and CEO. "Importantly, our performance enabled us to continue our returns to investors. Year-to-date, we have returned $12.8 million to shareholders through a combination of dividends and share repurchases."

"Our results reflect the positive impact of our new Mid-Am and Novo operations, acquired in Q3 2021 and Q1 2022, respectively. These businesses have brought us important scale, access to new geographies, and a strong presence in the U.S. Pro Dealer and home center channels, and combined, are expected to deliver approximately $1 billion in pro forma sales in 2022. We also achieved continued strong organic growth in the second quarter as consumer demand and product pricing remained resilient despite an environment of higher interest rates."

"On the market front, the North American repair and remodel market, which represents about 40% of our sales, continues to show strength, supporting demand for our products. The residential construction market, which represents another 40% of our business, also remained active as builders catch up the significant lag between housing starts and completions. With most of our products used in later stages of construction, we are benefiting from the elongated demand curve in this market."

"Going forward, we will continue to closely monitor economic conditions and the impacts that price inflation, rising interest rates, and other factors can have on our business. We benefit from a highly experienced team with a long track record of successfully managing our operations and controlling costs through changing markets. We believe our business has the resilience to manage through these cycles, and we anticipate a multi-year runway for growth and value creation as we benefit from our leading market position and the long-term positive fundamentals underpinning the North American building products market," said Mr. Brown.

Outlook

Over the long term, we expect demand for our products to remain resilient, supported by strong fundamentals in our end markets. We also continue to see a multi-year runway for growth in the repair and remodel, residential, and commercial end-markets that we participate in.

In the nearer term, rising inflation and recent interest rate hikes could have a negative impact on economic activity. As we have demonstrated in previous cycles, we will take all necessary actions required to effectively manage our business and cash flows. We maintain a strong balance sheet which provides financial stability through periods of changing market conditions. Our business model also converts a high proportion of EBITDA to operating cash flow before changes in working capital, and during periods of reduced activity our investment in working capital has historically decreased, resulting in an additional source of cash.

Outlook for our end-markets

The repair and remodel market (~40% of sales) is benefiting from current market trends. The increase in mortgage rates may effectively "lock in" current homeowners by offering a financial incentive to stay in existing homes that were financed at lower mortgage rates. At the same time,  home equity per owner is at record levels and the median age of homes in the U.S. is over 40 years, helping to support strong levels of repair and remodeling activity. These trends are expected to be an important driver of multi-year demand for our products.

In the residential construction market (~40% of sales), new building starts are expected to moderate in the near term as affordability headwinds weigh on consumers. However, given that housing completions have not kept pace with starts over the past quarters, we expect to see an elongated demand curve for our products, which are typically installed during the finishing stages of home construction. Over the longer term, leading indicators for the residential construction market remain highly favourable. Housing starts have meaningfully lagged population growth this past decade, and it is estimated that the U.S. has a housing supply deficit of over 3.5 million units. This supply deficit, combined with positive demographic factors, are expected to underpin long-term demand for new housing.

The demand outlook for U.S. commercial markets (~15% of sales) is mixed, with some sectors showing strength and others recovering at a slower pace. Commercial market participation is highly diverse for HDI and includes construction activity in healthcare, education, public buildings, hospitality, office, retail facilities and recreational vehicles. We expect certain of these commercial end markets will perform better than others, with the broad nature of our participation reducing the impact of dynamics in any one geography or end market.

Q2 2022 Investor Call

HDI will hold an investor call on Friday, August 12, 2022 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-800-304-0389 or (647) 484-0258 (GTA) at least five minutes before the call begins. A replay will be available through August 19, 2022 by calling toll free 1-888-203-1112 or (647) 436-0148 (GTA), followed by passcode 2912602.

Summary of Results











Three months


Three months


Six months


Six months



ended June 30


ended June 30


ended June 30


ended June 30



2022


2021


2022


2021


Total sales

$           700,263


$          338,014


$        1,345,149


$           629,173


 Sales in the US

645,899


291,358


1,237,121


543,654


 Sales in Canada (C$)

69,412


57,559


137,357


106,875


Gross profit

153,829


75,934


301,611


133,830


 Gross profit %

22.0 %


22.5 %


22.4 %


21.3 %


Operating expenses

(92,875)


(41,930)


(177,647)


(80,857)


Profit from operating activities

$             60,954


$            34,004


$           123,964


$             52,973


Add: Depreciation and amortization

16,487


6,202


31,693


12,315


Earnings before interest, taxes, depreciation and









 amortization ("EBITDA")

$             77,441


$            40,206


$           155,657


$             65,287


 EBITDA as a % of revenue

11.1 %


11.9 %


11.6 %


10.4 %


 Add (deduct):









    Depreciation and amortization

(16,487)


(6,202)


(31,693)


(12,315)


    Net finance income (expense)

(5,789)


(1,355)


(11,171)


(2,861)


    Income tax expense

(13,250)


(8,341)


(27,390)


(12,808)


Profit for the period

$             41,915


$            24,310


$             85,403


$             37,303


Basic profit per share

$                 1.77


$                1.14


$                 3.60


$                 1.75


Diluted profit per share

$                 1.76


$                1.13


$                 3.58


$                 1.73


Average Canadian dollar exchange rate for one US dollar     

$                 0.78


$                0.81


$                 0.79


$                 0.80


 

Analysis of Specific Items Affecting Comparability (in thousands of Canadian dollars) 

 


Three months


Three months


Six months


Six months



ended June 30


ended June 30


ended June 30


ended June 30



2022


2021


2022


2021


Earnings before interest, taxes, depreciation and









 amortization ("EBITDA"), per table above

$             77,441


$            40,206


$          155,657


$             65,287


Non-cash LTIP expense

1,152


1,622


1,850


2,288


Transaction expenses


2,168


892


2,168


Adjusted EBITDA

$             78,593


$            43,996


$          158,399


$             69,743


Adjusted EBITDA as a % of revenue                                       

11.2 %


13.0 %


11.8 %


11.1 %











Profit for the period, as reported

$             41,915


$            24,310


$            85,403


$             37,303


Adjustments, net of tax

1,049


3,127


2,299


3,732


Adjusted profit for the period

$             42,964


$            27,437


$            87,702


$             41,035











Basic profit per share, as reported

$                 1.77


$                1.14


$                3.60


$                 1.75


Net impact of above items per share

0.04


0.15


0.10


0.18


Adjusted basic profit per share

$                 1.81


$                1.29


$                3.70


$                 1.93











Diluted profit per share, as reported

$                 1.76


$                1.13


$                3.58


$                 1.73


Net impact of above items per share

0.04


0.15


0.10


0.17


Adjusted diluted profit per share

$                 1.80


$                1.28


$                3.68


$                 1.90











Results from Operations - Three Months Ended June 30, 2022

For the three months ended June 30, 2022, consolidated sales climbed to a record $700.3 million, an increase of $362.2 million, or 107.2%, from $338.0 million in the same period in 2021. Organic sales growth accounted for $78.2 million of this gain, representing a 23.1% increase in consolidated sales. The Novo and Mid-Am businesses ("Acquired Businesses") contributed an additional $201.7 million and $84.5 million of sales growth respectively, representing a combined 84.7% increase in sales from the Acquired Businesses. The increase in revenue was partially offset by $2.1 million of unfavorable foreign exchange impact.

Second quarter sales from our U.S. operations grew to $645.9 million, an increase of $354.5 million, or 121.7%, from $291.4 million in the same period in 2021. Organic sales growth accounted for $68.3 million of this improvement, representing a 23.5% increase in U.S. sales. The strong organic growth was primarily supported by robust market demand, which in turn contributed to improved product prices. The Novo and Mid-Am operations contributed an additional $286.2 million to second quarter U.S. sales growth, representing a 98.2% increase in U.S. sales.

In Canada, second quarter sales increased by C$11.9 million, or 20.6%, compared to the same period in 2021. The Canadian sales growth was entirely organic and reflects continued strong market demand, which has resulted in improved market prices for our products year-over-year.

Gross profit for the second quarter grew 102.6% to $153.8 million, from $75.9 million in the same quarter last year. This $77.9 million improvement reflects significant organic sales growth together with the addition of sales from the Acquired Businesses. Our second quarter gross profit margin of 22.0% was similar to the 22.5% achieved in the same period last year.

For the three months ended June 30, 2022, operating expenses increased by $50.9 million to $92.9 million, from $41.9 million in Q2 2021. As a percentage of sales, operating expenses were higher at 13.3%, as compared to 12.4% in the same period last year.

The $50.9 million increase in operating expenses includes $40.3 million related to the operations of the Novo and Mid Am businesses, $8.4 million to support organic growth, and $4.9 million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $2.2 million of Novo-related transaction costs incurred in Q2 2021, which did not repeat in 2022.

For the three months ended June 30, 2022, depreciation and amortization increased to $16.5 million, from $6.2 million in Q2 2021. This $10.3 million increase relates to the acquisition and operations of the Novo and Mid-Am businesses and is primarily comprised of $4.9 million of amortization on acquired intangible assets, and $5.2 million from depreciation related to operations.

For the three months ended June 30, 2022, net finance expense increased to $5.8 million, from $1.4 million last year. The increase was primarily driven by a higher interest on bank indebtedness used to finance the acquisitions of Novo and Mid-Am, and higher interest rates.

For the three months ended June 30, 2022, income tax expense increased to $13.2 million, from $8.3 million last year. This increase primarily reflects higher taxable income.

Second quarter Adjusted EBITDA climbed 78.6% to $78.6 million, from $44.0 million during the same period in 2021. The $34.6 million improvement was driven primarily by the $77.9 million increase in gross profit, partially offset by the $43.3 million increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP expense, and transaction expenses).

Profit for the second quarter grew 72.4% to $41.9 million, from $24.3 million in Q2 2021. The $17.6 million improvement primarily reflects the $37.2 million increase in EBITDA, partially offset by a $10.3 million increase in depreciation and amortization, the $4.9 million increase in income tax expense, and the $4.3 million increase in net finance expense.

For the three months ended June 30, 2022, basic profit per share climbed 54.9% to $1.77, from $1.14 in Q2 2021. Adjusted profit increased 56.6% to $43.0 million, from $27.4 million in Q2 2021 and Adjusted diluted profit per share grew 40.6% to $1.80, from $1.28 in the same period last year.

Results from Operations - Six Months Ended June 30, 2022

For the six months ended June 30, 2022, consolidated sales climbed to $1.3 billion, an increase of $716.0 million, or 113.8%, from $629.2 million in the same period in 2021. Organic sales growth accounted for $192.9 million of this gain, representing a 30.7% increase in consolidated sales. The Novo and Mid-Am businesses contributed an additional $394.6 million and $136.9 million of sales growth respectively, representing a combined 84.5% increase in sales from the Acquired Businesses. These gains were partially offset by the first quarter 2021 divestiture of our HMI business, which resulted in $6.4 million of sales from the first half of 2021 not recurring in the current period.  Foreign exchange fluctuations in the Canadian dollar also had an unfavorable $2.1 million impact on sales results.

First-half sales from our U.S. operations grew to $1.2 billion, a year-over-year increase of $693.5 million, or 127.6%, from $543.7 in the same period last year. Organic sales growth accounted for $168.3 million of this improvement, representing a 31.0% year-over-year increase in U.S. sales. The strong organic growth was primarily supported by robust market demand, which in turn contributed to improved product prices. The Novo and Mid-Am operations contributed an additional $531.6 million to first-half U.S. sales growth, representing a 97.8% increase in U.S. sales.

In Canada, sales for the first six months increased by C$30.5 million, or 28.5%, compared to the same period in 2021. The Canadian sales growth was entirely organic and reflects continued strong market demand, which has resulted in improved market prices for our products year-over-year.

Gross profit for the first half grew 125.4% to $301.6 million, from $133.8 million in the same period last year. This $167.8 million improvement reflects our significant organic and acquisition-based sales growth. At 22.4%, our gross profit margin was higher than the 21.3% we achieved in the same period last year. The increase in gross profit percentage includes the impact of favorable changes in product mix, and the successful execution of our internal strategies designed to improve gross margin percentage over time.

For the six months ended June 30, 2022, operating expenses were $177.6 million as compared to $80.9 million in the same period last year, an increase of $96.8 million. As a percentage of sales, operating expenses were well controlled at 13.2%, similar to 12.9% in the first half of last year.

The $96.8 million increase in operating expenses includes $75.6 million related to the operations of our newly acquired Novo and Mid Am businesses, $14.9 million to support organic growth, and $9.0 million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $1.3 million of Novo-related transaction costs incurred in the first half of 2021, which did not repeat in the 2022 period.

For the six months ended June 30, 2022, depreciation and amortization increased by $19.4 million to $31.7 million, from $12.3 million in the prior-year period. This increase relates to the acquisition and operations of the Novo and Mid-Am businesses and is primarily comprised of $9.0 million of amortization on acquired intangible assets, and $10.3 million from depreciation related to operations.

For the six months ended June 30, 2022, net finance expense increased to $11.2 million, from $2.9 million last year. The increase was primarily driven by a higher interest on bank indebtedness used to finance the acquisitions of Novo and Mid-Am.

For the six months ended June 30, 2022, income tax expense increased to $27.4 million, from $12.8 million last year, primarily driven by a higher taxable income.

First-half 2022 Adjusted EBITDA climbed 127.1% to $158.4 million, from $69.7 million in the same period of 2021. The $88.7 million improvement reflects the $167.8 million increase in gross profit, partially offset by the $79.1 million increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP expense, and transaction expenses).

Profit for the first six months grew 128.9% to $85.4 million, from $37.3 million in the first half of 2021. The $48.1 million profit improvement primarily reflects the $90.4 million increase in EBITDA, partially offset by a $19.4 million increase in depreciation and amortization, the $14.6 million increase in income tax expense and the $8.3 million increase in net finance expense.

For the six months ended June 30, 2022, basic profit per share climbed 105.7% to $3.60, from $1.75 in the same period last year. Adjusted profit increased 113.7% to $87.7 million, from $41.0 million in the first half of 2021 and Adjusted diluted profit per share grew 93.7% to $3.68, from $1.90 in the same period last year.

About HDI

HDI is one of North America's largest suppliers of specialty building products to fabricators, home centers and professional dealers servicing the new residential, repair and remodel, and commercial construction end-markets. The Company currently operates a network in North America of 86 facilities in the United States and Canada. HDI's common shares are listed on the Toronto Stock Exchange under the symbol HDI.

Non-GAAP Measures - EBITDA

References to "EBITDA" are to earnings before interest, income taxes, depreciation and amortization, where interest is defined as net finance costs as per the consolidated statement of comprehensive income. Furthermore, this press release references certain EBITDA Ratios, such as EBITDA margin (being EBITDA as a percentage of revenues). In addition to profit, HDI considers EBITDA and EBITDA Ratios to be useful supplemental measures of the Company's ability to meet debt service and capital expenditure requirements, and interprets trends in EBITDA and EBITDA Ratios as an indicator of relative operating performance.

References to "Adjusted EBITDA" are EBITDA as defined above, before certain items related to business acquisition activities. "Adjusted EBITDA margin" is as defined above, before certain items related to business acquisition activities, mark-to-market adjustments, and revaluation of deferred tax assets. References to "Adjusted profit", "Adjusted basic profit per share", and "Adjusted diluted profit per share" are profit for the period, basic profit per share, and diluted profit per share, before certain items related to business acquisition activities, mark-to-market adjustments, and revaluation of deferred tax assets. The aforementioned adjusted measures are collectively referenced as "the Adjusted Measures". HDI considers the Adjusted Measures to be useful supplemental measures of the Company's profitability, its ability to meet debt service and capital expenditure requirements, and as an indicator of relative operating performance, before considering the impact of business acquisition activities.

EBITDA, EBITDA Ratios, and the Adjusted Measures (collectively "the Non-GAAP Measures") are not measures recognized by International Financial Reporting Standards ("IFRS") and do not have a standardized meaning prescribed by IFRS.  Investors are cautioned that the Non-GAAP Measures should not replace profit, earnings per share or cash flows (as determined in accordance with IFRS) as an indicator of our performance.  HDI's method of calculating the Non-GAAP Measures may differ from the methods used by other issuers. Therefore,  Non-GAAP Measures may not be comparable to similar measures presented by other issuers.

Forward-Looking Statements

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

This news release includes forward-looking statements. These involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are identified by the use of terms and phrases such as "anticipate", "believe", "estimate", "expect", "may", "plan", "will", and similar terms and phrases, including references to assumptions. Forward-looking information is included, but not limited to, information included under the headings "Second Quarter Highlights", "Outlook", "Results of Operations for the Three Months Ended June 30, 2022", and "Results of Operations for the Six Months Ended June 30, 2022."

These forward-looking statements reflect current expectations of management regarding future events and operating performance as of the date of this news release. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to: it is difficult to reliably measure the potential impact of this uncertainty caused by the COVID-19 pandemic on our future financial results and the impacts to our Company are not determinable at the date of these financial statements, however they could be material and include impairments of receivables, inventory and reduction in available liquidity; given the uncertainty around the potential impact of COVID-19, this may impact our estimates disclosed in the consolidated financial statements given that there is significant judgment and estimation uncertainty; our results are dependent upon the general state of the economy and downturns in the economy (including inflation and rising interest rates), natural disasters, disease outbreaks, terrorist activities, or threats or acts of armed conflict (including the conflict between Russia and Ukraine), could have a negative impact on our business, financial condition, and results of operations; decreases in the supply of, demand for, or market values of our products could harm our business; our products may be subject to negative trade outcomes; we may not be able to sustain our level of sales or EBITDA margins; competition in our markets may lead to reduced revenues and profitability; we may become subject to more stringent regulations; we are dependent upon our management information systems; our insurance may be insufficient to cover losses that may occur as a result of our operations; we are dependent upon the financial condition and results of operations of our business; our credit facilities affect our liquidity, contain restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by our operating limited partnerships; and, other risks described in our Annual Information Form our Information Circular and in the MD&A.

Although the forward-looking statements contained in this news release are based upon what management believes to be reasonable assumptions, management cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements reflect management's current beliefs and are based on information currently available.

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, HDI undertakes no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof.

SOURCE Hardwoods Distribution Inc.

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