ADENTRA Announces Annual and Fourth Quarter 2023 Results

Adjusted EBITDA grows to US$44.5 million in the fourth quarter

US$238.1 million of cash flow from operations in 2023, including US$56.5 million in Q4

ADENTRA Inc. (“ADENTRA” or the “Company”) announced financial results for the three and twelve months ended December 31, 2023. ADENTRA is one of North America’s largest distributors of architectural building products to the residential, repair and remodel, and commercial construction markets. We 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.

Financial Highlights

• Generated full-year sales of $2.2 billion (C$3.0 billion), compared to $2.6 billion (C$3.4 billion) in 2022, a decrease of 13.2% attributable equally to a decrease in volumes and product prices; Q4 sales of $514.9 million (C$699.1 million), compared to $574.7 (C$780.4 million) in Q4 2022
• Gross margin percentage of 20.8% in 2023; Q4 gross margin percentage of 21.6%, representing our eleventh consecutive quarter with a gross margin percentage above 20.0%
• Operating expenses, after adjusting for accrued trade duties, decreased by $1.8 million to $358.3 million in 2023 despite significant inflationary pressures across the economy. Q4 operating expenses decreased by $5.5 million, or 6.0%, to $86.1 million
• Adjusted basic earnings per share were $2.43 (C$3.28) in 2023, compared to $5.71 (C$7.43) in 2022; Q4 adjusted basic earnings per share were $0.46 (C$0.62), as compared to $0.66 (C$0.90) per share in Q4 2022
• Full-year Adjusted EBITDA was $185.2 million (C$250.0 million), compared to $267.9 million (C$348.7 million) in 2022; Q4 Adjusted EBITDA increased to $44.5 million (C$60.4 million), up 2% from $43.6 million (C$59.2 million) in Q4 2022
• Generated strong cash flow from operating activities of $238.1 million in 2023, including $56.5 million in Q4 2023
• Effectively deployed capital in 2023, returning $17.8 million in cash to shareholders via dividends and share repurchases, and reducing debt by $223.6 million
• Announced an 8% increase to the quarterly dividend to C$0.14 per share, or C$0.56 annually, effective November 8, 2023

“We demonstrated the capabilities of our diversified business model in 2023, delivering strong results despite industry-wide volume declines and price deflation,” said Rob Brown, ADENTRA’s President and CEO. “While our results did not match the exceptional performance of 2022, our quarterly sales exhibited strong sequential resilience throughout the year and we maintained a gross margin percentage above 20% in every period.”

“Our fourth quarter performance was notable. Sales volumes stabilized year-over-year, contributing to Q4 sales of $514.9 million. Our gross margin reached 21.6%, the highest of 2023, and marked our eleventh consecutive quarter with a gross margin above 20%. This, together with a $5.5 million reduction in operating expenses, helped us grow fourth quarter Adjusted EBITDA to $44.5 million, up  2% year-over-year, while our Q4 Adjusted EBITDA margin increased to 8.6%, from 7.6%.”

“Our results for the full year affirm ADENTRA’s business strategy, particularly our success in building a stable, predictable business model that performs well throughout all business cycles. We demonstrated our business model’s ability to convert a high percentage of Adjusted EBITDA into operating cash flow before changes in working capital, and to release working capital and generate cash flow in periods of reduced economic activity. We generated full-year operating cash flow of $238.1 million, enabling us to reduce bank debt by $223.6 million, while lowering our Leverage Ratio to 2.7x. Additionally, we continued to provide returns for shareholders with the repurchase of 2% of our issued and outstanding shares in 2023 and an 8% increase in our quarterly dividend.”

“Looking forward we see signs that the macroeconomic environment is beginning to stabilize and, combined with our continued gross margin strength and disciplined management of operating expenses, will help to support our 2024 performance. Longer term, the fundamentals underpinning the North American building products market remain highly favorable, and combined with our own strategies for capturing share in our large addressable market, provide a multi-year runway for growth,” said Mr. Brown.

Outlook

Moving into 2024, the inflation and interest rate hikes of recent years are expected to continue to moderately impact economic activity. While our sales volumes have stabilized in recent quarters, we continue to experience softness in product pricing. Forecasters are anticipating a stable environment for residential construction in 2024 and a stable-to-lower year of demand for the repair and remodel market. Each of these markets represents approximately 40% of our business respectively.

We expect first quarter 2024 sales to be lower than in the same period in 2023, with higher volumes being offset by weaker product prices year-over-year. Sales comparisons to 2023 are expected to improve in the latter half of the year. In this environment, we anticipate modest growth in 2024 Adjusted EBITDA, driven by continued gross margin strength and disciplined management of operating expenses.

As we have demonstrated in previous business cycles and most recently in 2023, we are adept at managing our business and cash flows effectively in challenging market conditions. 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 industry. Our strong balance sheet provides financial stability as we move through periods of changing market conditions, and our business model is expected to continue converting a high proportion of EBITDA to operating cash flows before changes in working capital. In addition, our investment in working capital typically decreases during periods of reduced activity, resulting in an additional source of cash.

Over the longer term our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock. Forecasters are also anticipating potential interest rate cuts in the latter half of  2024, which could further support end-market demand for our products. We continue to see a multi-year runway for growth in the repair and remodel, residential, and commercial markets we participate in.

Introducing Revised Targets

At our analyst day in December 2022 we unveiled our strategic priorities and plans to continuing creating shareholder value. These priorities included our Destination 2026 goal of $3.5 billion in run-rate sales by 2026.

In 2023, the impact of the challenging macroeconomic environment, including industry-wide volume retraction and product price deflation, was stronger than we anticipated in our Destination 2026 plan. As noted in our outlook above, we also do not expect the market to grow meaningfully in 2024. As a result of these factors we have modified our plan with the revised goal of achieving $3.5 billion in run-rate sales by 2028, or the “Destination 2028” goal.

The other key metrics underpinning our $3.5 billion sales goal have not changed significantly from what was presented in the original plan. For further information, please refer to our investor presentation, which is posted on our company website.

Results from Operations – Year Ended December 31, 2023

For the year ended December 31, 2023, we generated total sales of $2.24 billion, as compared to the record-setting $2.58 billion we achieved in 2022 during a period of unusually high demand and product price inflation. The $340.2 million, or 13.2%, decrease primarily reflects a $362.6 million reduction in organic sales, partially offset by $28.6 million of incremental revenue from our acquisitions of Mid-Am and Rojo. The decrease in organic sales resulted from roughly equal parts lower volumes and product price deflation. The remaining $6.3 million of sales impact reflects an unfavorable foreign exchange impact related to the translation of Canadian sales to US dollars for reporting purposes.

Full-year sales from our US operations totaled $2.07 billion, as compared to $2.38 billion in 2022. The $311.0 million, or 13.1%, decrease reflects a $339.6 million year-over-year reduction in organic sales following the record-setting pace of 2022. The change in organic sales resulted from roughly equal parts lower volumes and product price deflation, partially offset by $26.4 million in additional revenue from a full year of Mid-Am’s results, compared to just under 11 months of contribution in the same period last year. Full-year US sales also include $2.3 million of contribution from the Rojo business acquired in the first quarter.

In Canada, full-year sales totaled C$229.0 million, as compared to C$258.8 million in 2022. This C$29.8 million, or 11.5%, decrease primarily reflects equal parts lower volumes and product price deflation.

Gross profit for the year ended December 31, 2023 was $466.1 million, as compared to $556.7 million in 2022. The $90.6 million, or 16.3%, year-over-year decrease reflects lower organic sales and a gross profit percentage of 20.8%, as compared to 21.6% in 2022. Our 2022 gross profit percentage was elevated during the first half of the year by favorable market dynamics, including strong demand and tight supply.

For the year ended December 31, 2023, operating expenses increased by $13.7 million to $373.8 million (16.7% of sales), from $360.1 million (14.0% of sales) in the same period last year.  The $13.7 million increase reflects accrued trade duties of $15.6 million, partially offset by savings related to increased operating efficiency.

Excluding the accrued trade duties, operating expenses decreased by $1.8 million year-over-year to $358.3 million, and operating expense as a percentage of sales was 16.0%, as compared to 14.0% in 2022. The reduction in operating expenses was primarily driven by a $6.5 million decrease in organic expenses, partially offset by $3.7 million in additional operating expenses from the inclusion of a full year’s results from the Mid-Am operations and $1.0 million of amortization on intangible assets acquired in connection with the Mid-Am acquisition.

For the year ended December 31, 2023, depreciation and amortization increased to $69.9 million, from $65.5 million in 2022, reflecting a $4.4 million increase. This includes $1.5 million of incremental depreciation and amortization related to the Mid-Am acquisition, with the remaining $2.9 million attributed to higher depreciation on premise leases in our operations. Of the total $69.9 million, $22.1 million represents amortization on acquired intangible assets, compared to $21.3 million in the prior year.

For the year ended December 31, 2023, net finance expense increased to $49.4 million, from $33.9 million in 2022. Of this total, $37.0 million represented interest on bank borrowing, up from $26.8 million in the prior year, reflecting higher interest rates on bank indebtedness in the current period. We entered into an interest rate swap to mitigate some of our exposure to interest rate variability.  

For the year ended December 31, 2023, income tax expense decreased to $6.9 million, from $34.1 million in 2022, primarily reflecting lower taxable income. The effective tax rate for 2023 was 16.0%, as compared to 21.0% last year. This improvement primarily reflects the benefit of other restructuring.

In 2023, we generated 2023 Adjusted EBITDA of $185.2 million, compared to $267.9 million in 2022. This $82.7 million, or 30.9%, change primarily reflects the $90.6 million decrease in gross profit,  partially offset by the $7.9 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, transaction expense and professional fees, and accrued trade duties).

We achieved net income of $36.0 million in 2023, as compared to $128.7 million in 2022. The $92.6 million, or 72.0%, decline was primarily driven by the $99.9 million decrease in  EBITDA, $15.5 million increase in net finance expense, and $4.4 million increase in depreciation and amortization, partially offset by the $27.3 million decrease in income tax expense.

For the year ended December 31, 2023, we generated basic earnings per share of $1.61, as compared to $5.50 in 2022. Our adjusted net income was $54.4 million, compared to $133.6 million in 2022, resulting in adjusted basic earnings per share of $2.43, as compared to $5.71 in the previous year.

Results from Operations – Three Months Ended December 31, 2023

For the three months ended December 31, 2023, we generated total sales of $514.9 million, as compared to $574.7 million in Q4 2022. The decrease of $59.9 million, or 10.4%, primarily reflects product price deflation with volumes remaining relatively stable year-over-year. Sales results were not significantly impacted by foreign exchange translation of Canadian sales to US dollars for reporting purposes.

Our US operations generated fourth quarter sales of $476.0 million, as compared to $533.2 million in the same period in 2022. The $57.2 million, or 10.7%, decrease primarily reflects product price deflation.

In Canada, fourth quarter sales of C$53.0 million were C$4.0 million, or 7.0%, lower than the same period in 2022. The year-over-year decrease primarily reflects product price deflation, partially offset by higher volumes.

We generated fourth quarter gross profit of $111.4 million, compared to $116.2 million in the same period last year. The $4.8 million, or 4.1%, decrease is mainly attributed to lower sales, partially offset by a higher gross margin percentage. Our fourth quarter gross margin percentage increased to 21.6%, from 20.2% in Q4 2022. This improvement was supported by reduced inventory write-downs of $2.4 million in the current quarter, compared to $7.5 million in Q4 2022. 

Fourth quarter operating expense decreased by $5.5 million, or 6.0%, year-over-year to $86.1 million, while operating expenses as a percentage of sales were 16.7% as compared to 15.9% in the same period last year. The reduction in operating expenses primarily reflects lower staffing costs, including a reduction in variable compensation, and a decrease in premises costs.

For the three months ended December 31, 2023, depreciation and amortization increased to $17.7 million, from $16.9 million in Q4 2022. Included in the $17.7 million was $5.5 million of amortization on acquired intangible assets, consistent with the same period last year. 

For the three months ended December 31, 2023, net finance expense decreased to $12.4 million, from $13.8 million in Q4 2022. This included $8.8 million of interest on bank borrowing, as compared to $9.7 million in Q4 2022. The decrease in interest expense primarily reflects lower bank indebtedness, partially offset by higher interest rates.

For the three months ended December 31, 2023, we recognized an income tax expense of $3.8 million, compared to an income tax recovery of $2.5 million in the same period last year.

Fourth quarter Adjusted EBITDA increased to $44.5 million, from $43.6 million in the same period in 2022. This $0.9 million, or 2.0%, year-over-year improvement largely reflects the $5.7 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, and transaction expense and professional fees), partially offset by the $4.8 million decrease in gross profit.

Net income for the fourth quarter of 2023 was $9.0 million (basic earnings per share of $0.40), as compared to $13.4 million (basic earnings per share of $0.59) in Q4 2022. The $4.4 million, or 32.8%, decrease was driven by the $6.4 million increase in income tax expense and the $0.8 million  increase in depreciation and amortization, partially offset by the $1.5 million increase in EBITDA and $1.3 million decrease in net finance expense.

We generated fourth quarter adjusted net income of $10.3 million, as compared to $15.0 million in Q4 2022. Adjusted basic earnings per share were $0.46, as compared to $0.66 in Q4 2022.

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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 currently 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.

Source: ADENTRA Inc.