ADENTRA Announces Annual and Fourth Quarter 2022 Results
ADENTRA Inc. (formerly, Hardwoods Distribution Inc.) (“ADENTRA” or the “Company”) (TSX: ADEN) today announced financial results for the three and twelve months ended December 31, 2022. 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 currently operates a network of 87 facilities in the United States and Canada. All amounts are shown in United States dollars (“U.S. $” or “$”), unless otherwise noted.
Financial Highlights for 2022
- Sales grew 59.6% to a record $2.6 billion (C$3.4 billion), from $1.6 billion (C$2.0 billion) in 2021, an increase of $963.4 million (C$1.4 billion)
- Sales results included organic growth of 14.6% and acquisition-based growth of 45.8%
- Gross profit grew 49.3% year-over-year to $556.7 million; gross margin percentage of 21.6%
- Operating expenses as a percentage of sales remained stable at 14.0%
- Adjusted basic earnings per share increased to a record $5.71 per share, up 9.6%, or $0.50, year-over-year; basic earnings per share increased 14.3%, or $0.69, to $5.50 per share
- Adjusted EBITDA climbed 37.2% to a record $267.9 million (C$348.7 million) and Adjusted EBITDA margin of 10.4%; net income increased 24.7% to $128.7 million (C$167.4 million)
- Cash flow from operating activities grew to $210.7 million, including cash flow from operating activities of $127.2 million in the fourth quarter
- Inventory destocking contributed $81.8 million of the fourth quarter cash release
- Effectively deployed capital throughout the year: Completed the purchase of Mid-Am for $273.7 million; repurchased 1,245,028, or over 5%, of the Company’s issued and outstanding shares; and announced an increase to the quarterly dividend of 8%, the Company’s tenth increase in the last ten years
- Ended the year with a strong balance sheet, and a Leverage Ratio of 2.4 times
- Released our inaugural sustainability report in February 2023
- Acquired Rojo Distributors in February 2023
- Unveiled growth plans, including our “Destination 2026” goal of $3.5 billion in run-rate sales by 2026
- Disclosed our strategic priorities, including a continued focus on digital engagement with our customers
- Rebranded the Company to ADENTRA
“It was an exceptional year for ADENTRA as our growth strategy, proven business model, and disciplined operating management drove record top and bottom-line performance,” said Rob Brown, ADENTRA’s President and CEO. “Our results were supported by our business platform, which is now more balanced than at any time in our history and includes significant diversification of end-markets, customer channels, product categories, and geographic coverage.”
“Our strong financial performance further enabled us to generate over $210 million of cash flow from operations in 2022, which speaks to our business model’s ability to translate financial results into attractive cash flows. We put this capital to work to enhance shareholder value, including financing the purchase of the Mid-Am acquisition, repurchasing over 5% of our issued and outstanding shares, and increasing our quarterly dividend by 8%.”
“Heading into 2023, we are already creating new value for shareholders,” added Mr. Brown. “In February 2023, we closed on our acquisition of Rojo Distributors, which strategically complements our footprint and product mix in West Texas. Also in February, we reached a new milestone as we issued our first sustainability report. Our intention is to build a highly sustainable future for ADENTRA and our stakeholders, and we believe reporting on our progress will help to support this goal.”
“As we move forward, we will continue to closely monitor changing economic conditions and the impacts that price inflation, rising interest rates, and other factors can have on our business. We benefit from an experienced team with a long track record of successfully managing our operations and controlling costs through changing markets. We are further supported by our diversification and by our proven ability to generate cash flows even in periods of reduced activity.”
“On a multi-year basis, we continue to see runway for growth and value creation as we benefit from our leading market position, the long-term fundamentals underpinning the North American buildings products market, and our proven strategies for achieving profitable growth. Our top-line goal, as set out at our most recent analyst day, is to achieve $3.5 billion in run-rate sales by 2026. I am confident in our ability to achieve this goal and excited by the opportunity to continue building long-term value for our shareholders in the process,” said Mr. Brown.
Rising inflation and interest rate hikes are expected to have a near-term negative impact on economic activity. This, in turn, will result in a moderation of demand for our products and could lead to softer product pricing and volumes as compared to our recent trend. As a result, we expect reduced financial performance in 2023 as compared to the record setting levels achieved in 2022.
Sales pace in January and February of 2023 was similar to that in the fourth quarter of 2022. Gross margin percentage through the first two months of 2023 was 20%.
As we have demonstrated in previous business cycles, we intend to effectively manage our business and cash flows. Our size and scale, together with the diversity in our product categories, customer channels and end-markets, provide important stability while reducing our exposure to any one geography or segment of the economy. Additionally, 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 flows before changes in working capital. During periods of reduced activity, our investment in working capital typically decreases, resulting in an additional source of cash.
Over the longer 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 markets we participate in.
Outlook for our end-markets
Growth rates in the repair and remodel market (~40% of sales) are expected to moderate in 2023 following two years of higher-than-normal growth. The Joint Center for Housing Studies of Harvard University anticipates a growth rate of 2.6% for the U.S. repair and remodel market by the fourth quarter of 2023. Overall, market fundamentals are 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 decreased 25% in 2022 as affordability headwinds weigh on consumers. However, we continue to benefit from an elongated demand curve, with significant volumes of homes already under construction still moving toward completion and our products typically installed during the finishing stages of home construction. Over the longer term, leading indicators for the residential construction market remain favorable. Housing starts have meaningfully lagged population growth this past decade and 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 ADENTRA and includes construction activity in healthcare, education, public buildings, hospitality, office, retail facilities and recreational vehicles. We expect this market to be flat in 2023.
As we move forward, we are well positioned with an industry-leading, world-class platform for architectural products that supports the continued growth and profitability of our business. This includes continued opportunities for acquisition-based growth in a highly fragmented industry. Although we are one of the largest distributors in our industry, our market share amounts to approximately 6%. We see significant market share opportunities, both organic and acquisitions based, which we intend to capture. Our goal is to grow sales to $3.5 billion by 2026 (run-rate). Further details on our goal and financial KPI’s can be found in the investor presentation on our website.
Results from Operations – Year Ended December 31, 2022
For the year ended December 31, 2022, total sales increased 59.6% to a record $2.6 billion, from $1.6 billion in 2021. Of the $963.4 million year-over-year improvement, organic sales growth accounted for a $236.4 million, or a 14.6%, increase in total sales. Acquisition-based growth, including Novo’s January to July 2022 revenue of $453.5 million and Mid-Am’s February to December 2022 revenue of $287.5 million, increased consolidated revenue by a combined 45.8% year-over-year. These gains were partially offset by the first quarter 2021 divestiture of our Hardwoods of Michigan (“HMI”) business, which resulted in $6.4 million of sales not recurring in the current period and a $7.6 million unfavorable foreign exchange impact related to the translation of Canadian sales to U.S. dollars for reporting purposes.
Full-year sales from our U.S. operations grew $939.5 million, or 65.2% to $2.4 billion, from $1.4 billion in 2021. Organic sales growth accounted for $198.6 million of this improvement, representing a 13.8% year-over-year increase in U.S. sales. The strong organic sales 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 $741 million to U.S. sales growth for the period, representing a 51.4% increase in U.S. sales over the same period last year.
In Canada, full-year sales increased by C$39.0 million, or 17.8%, compared to 2021. The Canadian sales growth was entirely organic and reflects the strong market demand, which resulted in improved market prices for our products year-over-year.
Gross profit for the year ended December 31, 2022 grew 49.3% to $556.7 million, from $372.9 million compared to 2021. This $183.8 million improvement reflects our significant organic growth and acquisition-based growth. At 21.6%, our 2022 gross profit as a percentage of total sales was below the exceptionally strong 23.1% achieved in the prior year. Our 2021 gross profit percentage was temporarily elevated due to favorable market dynamics, including strong demand and tight supply.
For the year ended December 31, 2022, operating expenses were $360.1 million as compared to $224.6 million the prior period, an increase of $135.5 million. As a percentage of total sales, operating expenses for the year ended December 31, 2022 were well controlled at 14%, similar to 13.9% in 2021.
The $135.5 million increase in operating expenses includes $102.2 million of expenses related to the acquisition and operations of the Novo and Mid-Am businesses (“Acquired Businesses”), $23.0 million to support organic growth, and $14.9 million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $3.9 million higher transaction costs incurred in 2021 compared to 2022.
For the year ended December 31, 2022, depreciation and amortization increased by $28.9 million to $65.5 million, from $36.6 million in 2021. This increase mainly relates to the acquisition and operations of the Acquired Businesses and is primarily comprised of $14.9 million of amortization on acquired intangible assets and $13.3 million from depreciation related to operations.
For the year ended December 31, 2022, net finance expense increased to $33.9 million, from $10.7 million in the prior year. The increase reflects higher interest rates combined with the issuance of new bank indebtedness used to finance the acquisitions of Novo and Mid-Am.
For the year ended December 31, 2022, income tax expense decreased to $34.1 million, from $34.5 million in 2021, primarily driven by a higher effect of tax rate differentials and restructuring and partially offset by higher income before income taxes.
Adjusted EBITDA climbed 37.2% to $267.9 million in 2022, from $195.2 million in 2021. This $72.7 million improvement reflects the $183.8 million increase in gross profit, partially offset by the $111.1 million increase in operating expenses (before changes in depreciation and amortization, LTIP expense, professional fees, and transaction expenses).
Net income for the year ended December 31, 2022 grew 24.7% to $128.7 million, from $103.1 million in 2021. The $25.5 million improvement primarily reflects the $77.2 million increase in EBITDA, partially offset by a $28.9 million increase in depreciation and amortization, and the $23.2 million increase in net finance expense.
For the year ended December 31, 2022, basic earnings per share climbed 14.3% to $5.50, from $4.81 in 2021. Adjusted net income increased 19.6% to $133.6 million, from $111.7 million in 2021 and Adjusted diluted earnings per share grew 9.9% to $5.68, from $5.17 in 2021.
Results from Operations – Three Months Ended December 31, 2022
For the three months ended December 31, 2022, total sales grew 11.5% to $574.7 million, from $515.4 million in the same period in 2021. This $59.4 million increase was driven by the acquisition of Mid-Am, which contributed $68.5 million of sales during the period. This was partially offset by a $5.9 million, or 1.1%, decrease in organic sales, and by a $3.2 million unfavorable foreign exchange impact related to the translation of Canadian sales to US dollars for reporting purposes.
Fourth quarter sales from our U.S. operations grew 13.3% to $533.2 million, an increase of $62.5 million from $470.7 million in the same period in 2021. Incremental revenue from the acquisition of Mid-Am contributed $68.5 million to fourth quarter U.S. sales growth, representing a 15% increase in U.S. sales. This was partially offset by a $6.0 million, or 1.3%, decrease in organic sales, reflecting lower volumes, partially offset by higher year-over-year product prices.
In Canada, fourth quarter sales increased by C$0.7 million, or 1.3%, 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.
We generated gross profit for the fourth quarter of $116.2 million, as compared to $122.9 million in the same period last year. The $6.7 million, or 5.5%, year-over-year change reflects lower organic sales and a reduced gross profit percentage of 20.2%. Gross profit in the fourth quarter included $7.6 million of inventory write-downs. Excluding the impact of these inventory write-downs, gross profit as a percentage of total sales was 21.5% as compared to 24.1% in Q4 2021. The unusually high gross profit percentage achieved in the fourth quarter of 2021 was not expected to repeat and reflected favorable market dynamics, including strong demand and tight supply which resulted in a rapid increase in product prices in that period.
For the three months ended December 31, 2022, operating expenses increased by $15.1 million to $91.6 million, from $76.4 million in the same period last year. As a percentage of sales, operating expenses were 15.9%, as compared to 14.8% in the same period last year.
The $15.1 million increase in operating expenses includes $8.7 million related to incremental operating expenses from the Acquired Businesses, $3.9 million related to organic growth initiatives, including temporary inventory storage and sales and marketing activities, and $2.6 million of amortization on intangible assets acquired in connection with the Mid-Am acquisition.
For the three months ended December 31, 2022, depreciation and amortization increased to $16.9 million, from $12.5 million in Q4 2021. This $4.4 million increase primarily relates to the acquisition and operations of the Mid-Am business and is comprised of $2.6 million of amortization on acquired intangible assets and $1.4 million from depreciation related to operations during the period.
For the three months ended December 31, 2022, net finance expense increased to $13.8 million, from $4.0 million in the same period last year. This increase was primarily driven by higher interest rates and interest costs on the additional bank indebtedness used to finance the acquisitions of Novo and Mid-Am.
For the three months ended December 31, 2022, income tax recovery was $2.5 million compared to $10.3 million income tax expense last year, primarily reflecting lower taxable income and the benefit of tax restructuring.
We generated Adjusted EBITDA of $43.6 million in Q4 2022, as compared to $61.7 million during the same period in 2021. The $18.1 million, or 29.3%, change was driven primarily by the $6.7 million decrease in gross profit and the $11.4 million increase in operating expenses (before changes in depreciation and amortization, LTIP expense, professional fees and transaction expenses).
Net income for the fourth quarter of 2022 was $13.4 million, as compared to $32.1 million in Q4 2021. The $18.8 million or 58.3% change primarily reflects the $17.4 million decrease in EBITDA, the $4.4 million increase in depreciation and amortization, and the $9.7 million increase in net finance expense, partially offset by the $12.9 million decrease in income tax expense.
For the three months ended December 31, 2022, we generated basic earnings per share of $0.59, as compared to $1.47 in Q4 2021. Adjusted net income was $15.0 million, as compared to $34.4 million in Q4 2021, and Adjusted diluted earnings per share was $0.65, as compared to $1.56.
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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 currently operates a network of 87 facilities in the United States and Canada. ADENTRA’s common shares are listed on the Toronto Stock Exchange under the symbol ADEN.
Source: ADENTRA Inc.