HDI Announces Third Quarter 2022 Results

Hardwoods Distribution Inc. (“HDI” or the “Company”) announced financial results for the three and nine months ended September 30, 2022 and an 8% increase to the quarterly dividend. 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.

Third Quarter Highlights

• Third quarter sales grew 39.9% to $659.7 million, a year-over-year increase of $188.0 million. Achieved organic sales growth of 10.4% and acquisition-based sales growth of 29.9%.
• Gross profit climbed 19.6%, or $22.8 million, to $139.0 million, with gross profit margin percentage of 21.1%, as compared to 24.6% in the same period last year.
• Profit per share was $1.28; adjusted profit per share was $1.32 per share
• Adjusted EBITDA climbed 3.4% to $66.0 million, from $63.8 million during the same period in 2021.
• Cash flow from operating activities, before changes in working capital, was $1.84 per share.
• In Canadian dollars, sales for the third quarter were C$856.7 million, adjusted profit per share was C$1.71, and Adjusted EBITDA was C$85.7 million.
• The board of directors today approved an 8% increase to the quarterly dividend to C$0.13 per share, from C$0.12 per share previously, which equates to C$0.52 per share on an annual basis. The increase is effective with the quarterly dividend payable on January 27, 2023 to shareholders of record as at January 16, 2023.

“We achieved another quarter of excellent financial and operating performance as our growth strategy, proven business model and disciplined operating management combined to deliver very strong third quarter results,” said Rob Brown, HDI’s President and CEO. “Market conditions remained supportive of our business, with increased product prices resulting in strong organic sales growth of over 10% as compared to the same quarter last year. Combined with acquisition-based growth, our total sales grew nearly 40% year-over-year.”

“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 over $1 billion in pro forma sales in 2022.”

“Importantly, our performance has enabled us to increase our returns to investors. In the first nine months of 2022, we returned almost $25 million to shareholders through a combination of dividends and share repurchases, up from $5.0 million in the same period last year. With today’s announcement of an 8% increase to our quarterly dividend, we are providing further returns to our shareholders going forward.”

“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

In the nearer term we anticipate that rising inflation and recent interest rate hikes will have a negative impact on economic activity, and this may result in a moderation of demand for our products. 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. 

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

Outlook for our end-markets 

The repair and remodel market (~40% of sales) is expected to remain strong, albeit with a tempering of the higher-than-normal growth rates experienced in the past year. The Joint Center for Housing Studies of Harvard University anticipates a growth rate of 6.5% for the U.S. repair and remodel market by the third quarter of 2023. Overall, the market remains well supported by record levels of home equity in the U.S. and a median home age of over 40 years. Disaster repairs and mitigation projects following Hurricane Ian are also expected to support the home remodeling market in the coming year.

In the residential construction market (~40% of sales), new building starts have moderated as affordability headwinds weigh on consumers, but remain at historically healthy levels. Given that housing completions have not kept pace with starts over the past quarters, we also continue 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 favorable. 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, is 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.

Results from Operations – Three Months Ended September 30, 2022

For the three months ended September 30, 2022, consolidated sales grew to  $659.7 million, an increase of $188.0 million, or 39.9%, from $471.7 million in the same period in 2021. Organic sales growth accounted for $48.9 million of this gain, representing a 10.4% increase in consolidated sales.  Acquired businesses (the “Acquired Businesses”) contributed an additional $140.9 million of the sales growth, and included Novo’s July 2022 revenue of $58.8 million and Mid-Am’s Q3 2022 revenue of $82.0 million. Combined, additional revenue from Acquired Businesses represented a 29.9% increase in total sales. These gains were partially offset by $1.8 million of unfavorable foreign exchange impact. 

Third quarter sales from our U.S. operations grew to $610.4 million, an increase of $183.6 million, or 43.0%, from $426.7 million in the same period in 2021. Organic sales growth accounted for $42.7 million of this improvement, representing a 10.0%  increase in U.S. sales. The strong organic growth was primarily supported by increased product prices, partially offset by a modest decrease in volumes. Incremental revenue from Acquired Businesses contributed an additional $140.9 million to third quarter U.S. sales growth, representing a 33% increase in U.S. sales.

In Canada, third quarter sales increased by C$7.8 million, or 13.8%, compared to the same period in 2021. The Canadian sales growth was entirely organic and reflects higher product prices year-over-year, partially offset by a modest decrease in volumes.

Gross profit for the third quarter grew 19.6% to $139.0 million, from $116.2 million in the same quarter last year. This $22.8 million improvement reflects the significant sales growth, partially offset by a lower gross margin percentage.  At 21.1%, our gross margin percentage did not match the unusually high 24.6% achieved in Q3 2021 when favorable market dynamics, including strong demand and tight supply, resulted in a rapid increase in product prices as compared to the cost of inventory. 

For the three months ended September 30, 2022, operating expenses increased by $23.6 million to $90.9 million, from $67.3 million in Q3 2021. As a percentage of sales, operating expenses were lower at 13.8%, as compared to 14.3% in the same period last year. 

The $23.6 million increase in operating expenses includes $15.8 million related to incremental operating expenses from our Acquired Businesses, $6.4 million to support organic growth, and $3.3 million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $1.9 million of Novo-related transaction costs incurred in Q3 2021, which did not repeat in 2022. 

For the three months ended September 30, 2022, depreciation and amortization increased to $16.8 million, from $11.7 million in Q3 2021. This $5.1 million increase primarily relates to the acquisition and operations of the Novo and Mid-Am businesses and is comprised of $3.3 million of amortization on acquired intangible assets and $1.8 million from depreciation related to operations.

For the three months ended September 30, 2022, net finance expense increased to $8.9 million, from $3.8 million last year. This increase was primarily driven by interest costs on the additional bank indebtedness used to finance the acquisitions of Novo and Mid-Am, as well as higher interest rates.

For the three months ended September 30, 2022, income tax expense decreased to $9.3 million, from $11.4 million last year, primarily reflecting lower taxable income.

Third quarter Adjusted EBITDA climbed 3.4% to $66.0 million, from $63.8 million during the same period in 2021. The $2.2 million improvement was driven primarily by the $22.8 million increase in gross profit, partially offset by the $20.6 million increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP expense, and transaction expenses).

Profit for the third quarter decreased by 11.3% to $29.9 million, from $33.7 million in Q3 2021. The $3.8 million change primarily reflects a $5.1 million increase in depreciation and amortization, and the $5.0 million increase in net finance expense, partially offset by the $4.3 million increase in EBITDA and $2.1 million lower income tax expense.

For the three months ended September 30, 2022, we generated basic profit per share of $1.28, as compared to $1.58 in Q3 2021, a decrease of 19.0%. Adjusted profit was $30.8 million, as compared to  $36.3 million in Q3 2021, a decrease of 15.0% and  Adjusted diluted profit per share was $1.31, as compared to $1.68, a decrease of 22.0%.

Results from Operations – Nine Months Ended September 30, 2022

For the nine months ended September 30, 2022, consolidated sales climbed 82.1% to $2.0 billion, an increase of $904.0 million from $1.1 billion in the same period in 2021. Organic sales growth accounted for $241.9 million of this gain, representing a 22.0% increase in consolidated sales. Acquisition-based revenue growth, including Novo’s January to July 2022 revenue of $453.5 million, and Mid-Am’s year-to-date revenue of $219.0 million, increased  consolidated revenue by a combined 61.1% year-over-year. These gains were partially offset by the first quarter 2021 divestiture of our HMI business, which resulted in $6.4 million of sales not recurring in the current period. Foreign exchange fluctuations in the Canadian dollar also had an unfavorable $4.0 million impact on sales results.

First nine months sales from our U.S. operations grew 90.4% to $1.8 billion, a year-over-year increase of $877.1 million, from $970.4 million in the same period last year. Organic sales growth accounted for $204.6 million of this improvement, representing a 21.1% year-over-year increase in U.S. sales. The strong organic growth was primarily supported by robust market demand, particularly during the first half of the year, which in turn contributed to improved product prices. The Novo and Mid-Am operations contributed an additional $672.5 million to year-to-date U.S. sales growth, representing a 69.3% increase in U.S. sales.

In Canada, sales for the first nine months increased by C$38.3 million, or 23.4%, compared to the same period in 2021. The Canadian sales growth was entirely organic and reflects the strong market demand particularly in the first half of the year, which resulted in improved market prices for our products year-over-year.

Gross profit for the first nine months grew 76.2% to $440.6 million, from $250.0 million in the same period last year. This $190.6 million improvement reflects our significant organic and acquisition-based sales growth. At 22.0%, our gross profit margin was slightly lower than the 22.7% we achieved in the same period last year. The gross margin percentage in 2021 was temporarily elevated due to favorable market dynamics, including strong demand and tight supply. 

For the nine months ended September 30, 2022, operating expenses were $268.5 million as compared to $148.2 million in the same period last year, an increase of $120.4 million. As a percentage of sales, operating expenses were well controlled at 13.4%, similar to 13.5% in the first nine months of last year. 

The $120.4 million increase in operating expenses includes $90.3 million related to operation of our Acquired Businesses, $21.0 million to support organic growth, and $12.3 million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $3.2 million of Novo-related transaction costs incurred in the first nine months of 2021, which did not repeat in the 2022 period. 

For the nine months ended September 30, 2022, depreciation and amortization increased by $24.5 million to $48.5 million, from $24.1 million in the prior-year period. This increase mainly relates to the acquisition and operations of the Novo and Mid-Am businesses and is primarily comprised of $12.3 million of amortization on acquired intangible assets, and $12.1 million from depreciation related to operations.

For the nine months ended September 30, 2022, net finance expense increased to $20.1 million, from $6.7 million last year. The increase was primarily driven by interest on issuance of new bank indebtedness used to finance the acquisitions of Novo and Mid-Am, combined with higher interest rates.

For the nine months ended September 30, 2022, income tax expense increased to $36.7 million, from $24.2 million last year, primarily driven by a higher taxable income.

Year-to-date Adjusted EBITDA climbed 68.0% to $224.4 million, from $133.6 million in the same period of 2021. This $90.8 million improvement reflects the $190.6 million increase in gross profit, partially offset by the $99.8 million increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP expense, and transaction expenses).

Profit for the first nine months grew 62.4% to $115.3 million, from $71.0 million in the first nine months of 2021. The $44.3 million profit improvement primarily reflects the $94.6 million increase in EBITDA, partially offset by a $24.5 million increase in depreciation and amortization, the $12.5 million increase in income tax expense, and the $13.4 million increase in net finance expense.

For the nine months ended September 30, 2022, basic profit per share climbed 46.4% to $4.89, from $3.34 in the same period last year. Adjusted profit increased 53.3% to $118.5 million, from $77.3 million in the first nine months of 2021 and Adjusted diluted profit per share grew 39.4% to $4.99, from $3.58 in the same period last year.

For the complete press release, click here.

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.

Contact:

Ian Tharp – Investor Relations – investors@hddist.com – (416) 567-2563

Source: Hardwoods Distribution Inc.