Hardwoods Announces Second Quarter 2014 Results

Record Quarterly Sales, Strongest Quarterly EBITDA in 10 Years
Declares Dividend of $0.045 per share

TRADING SYMBOL: Toronto Stock Exchange – HWD

LANGLEY, BC, Aug. 13, 2014 /CNW/ – Hardwoods Distribution Inc. ("Hardwoods" or the "Company") today announced financial results for the three and six month periods ended June 30, 2014. Hardwoods is one of North America's largest wholesale distributors of hardwood lumber and related sheet good products, operating a network of 33 facilities in the US and Canada.

Highlights
(For the three months ended June 30, 2014)

  • Record quarterly sales of $119.0 million

  • Second quarter gross profit increased by 13.5% to $20.5 million year-over-year

  • Second quarter EBITDA increased by 11.9% to $7.5 million, the Company's strongest quarterly EBITDA performance in 10 years

  • Profit for the period of $4.0 million, down $0.4 million compared to the same quarter a year ago primarily due to higher US taxes and reduced foreign exchange gains

  • On April 28, 2014, Hardwoods acquired Hardwoods of Michigan, Inc. ("HMI") for US $15.0 million. Based in Clinton, Michigan, HMI is a fully integrated producer, distributor and exporter of high quality hardwood lumber.

  • The Board of Directors approved a quarterly dividend of $0.045 per share, payable on October 31, 2014 to shareholders of record as at October 20, 2014.

"We achieved the best quarterly sales results in our history and generated near-record EBITDA during the three months ended June 30, 2014," said Hardwoods' CFO Rob Brown who is serving as Acting Chief Executive Officer of the Company while CEO Lance Blanco recovers from a cycling accident.

Organic and acquisition-based growth contributed to the strong sales performance, supported by continuing improvement in the US housing market and the positive impact of a lower Canadian dollar. According to the US Census Bureau, the seasonally adjusted annual rate of US housing starts averaged 980,333 during the second quarter, up 13.4% from 864,667 in the same period last year. Product pricing was mixed for the period, with hardwoods lumber prices rising, panel prices remaining stable and prices for Chinese panel products declining year-over-year due to the discontinuation of US preliminary trade duties on these products in November 2013.

As anticipated, second quarter gross profit margin did not match the unusually high 18.9% margin achieved a year ago during a period of rapid product price escalation. The 17.2%, second quarter of 2014 gross margin reflects the more stable product pricing, increased competition, strategic efforts to increase market share in certain parts of the business, and the addition of the new HMI manufacturing business during the quarter.

"We anticipate our new HMI business will generate approximately $33 million in additional revenues per year with opportunity to grow," said Mr. Brown. "HMI provides cross-selling opportunities for our established lines of import products and expands upon our value-added manufacturing capabilities.  HMI is a strong and strategic addition to the business, well-timed to the ongoing recovery in the US housing market."

In conjunction with the HMI transaction, Hardwoods increased its US credit facility from US $50.0 million to US $79.1 million and extended the term of the facility to April 27, 2017.  Hardwoods was also successful in increasing cash provided by operating activities by $12.0 million during the second quarter, compared to the same period in the prior year.  This increase in operating cash flow came primarily through more efficient management of working capital. 

"Our net debt at June 30, 2014 of $46.5 million is comparable to the net debt we had a year earlier at June 30, 2013 of $45.9 million.  This was achieved during a period of significant growth for Hardwoods and includes having made a cash payment of $15.3 million for the HMI acquisition in the second quarter of 2014.  Our ability to generate cash flow from operations has positioned us with a strong balance sheet to support our future growth initiatives," said Mr. Brown.

Going forward, Hardwoods has a strong and experienced management team in place to continue running the business and executing the Company's well-established business strategy during CEO Lance Blanco's convalescence period.

"Our outlook for the remainder of 2014 remains positive.  We are pleased to declare another quarterly dividend of $0.045 per share while we continue to execute our strategies to grow our business," added Mr. Brown.

Summary of Results









Selected Unaudited Consolidated Financial Information  (in thousands of Canadian dollars except where noted)


























3 months ended

3 months ended

6 months ended


6 months ended






June 30,


June 30,


June 30,


June 30,







2014



2013




2014




2013

Total sales



$

119,038


$

95,617



$

219,972



$

182,600


Sales in the US (US$)



83,521



69,535




153,062




133,447


Sales in Canada



27,904



24,484




52,093




47,044

Gross profit 




20,528



18,081




38,791




33,981


Gross profit %




17.2%



18.9%




17.6%




18.6%

Operating expenses




(13,500)



(11,683)




(27,098)




(22,769)

Profit from operating activities



7,028



6,398




11,693




11,212

Add:  Depreciation




515



342




953




671

Earnings before interest, taxes, depreciation and 

















amortization  ("EBITDA")



7,543



6,740



$

12,646



$

11,883


Add (deduct):


















Depreciation



(515)



(342)




(953)




(671)



Net finance income (cost)



(414)



102




(349)




269



Income tax expense



(2,618)



(2,097)




(4,383)




(3,898)

Profit for the period



$

3,996


$

4,403



$

6,961



$

7,583

Basic and fully diluted profit per share

$

0.24


$

0.27



$

0.42



$

0.46

Average Canadian dollar exchange rate for one US dollar


1.090



1.023




1.097




1.016

 

Results from Operations – Three Months Ended June 30, 2014

For the three months ended June 30, 2014, total sales increased by 24.5% to $119.0 million, from $95.6 million in the second quarter of 2013. Hardwoods' US operations increased sales by 20.1% to US $83.5 million, reflecting US $7.3 million in organic growth and US $6.7 million  in incremental revenue from acquired businesses, including the Leland import lumber business acquired on May 31, 2013 and the new HMI business, acquired on April 28, 2014.

Second quarter sales in Canada increased by $3.4 million, or 14.0% year over year, to $27.9 million  Double-digit growth was achieved in all regions, reflecting successes in winning new business, as well as overall stronger product prices and the positive impact of a weaker Canadian dollar. 

Second quarter gross profit increased to $20.5 million, up 13.5% from $18.1 million during the same period last year. This improvement reflects the higher sales revenue, partially offset by the lower gross profit margin of 17.2%.

Operating expenses for the three-month period ended June 30, 2014 were $13.5 million, compared to $11.7 million during the same period a year ago.  This increase primarily reflects incremental costs from the acquired HMI and Leland businesses, additional personnel costs incurred to support existing and anticipated sales growth, and higher expenses due to the impact of a weaker Canadian dollar on translation of US operating expenses. As a percentage of sales, operating expenses improved to 11.3% of sales from 12.2% in the second quarter of 2013.

Second quarter EBITDA increased 11.9% to $7.5 million, from $6.7 million during the same period in 2013. The EBITDA gain reflects the increase in gross profit, partially offset by higher expenses.  Profit for the period was $4.0 million, compared to $4.4 million during the same period in 2013. The year-over-year change reflects a $0.2 increase in depreciation and amortization, a $0.5 million increase in net finance cost, and a $0.5 million increase in income tax expense, partially offset by the $0.8 million improvement in EBITDA. 

Results from Operations – Six Months Ended June 30, 2014

For the six months ended June 30, 2014, total sales increased by 20.5% to $220.0 million, from $182.6 million in the first half of 2013. Hardwoods' US operations increased sales by US$19.6 million, or 14.7%, reflecting US$11.9 million in organic growth and US $7.7 million in incremental revenue from acquired businesses. First half sales in Canada increased by $5.0 million, or 10.7%, year-over-year, entirely on organic growth.

First-half gross profit increased 14.2% to $38.8 million, from $34.0 million in the first six months of 2013. This gain reflects the increased sales, partially offset by a lower gross margin of 17.6%.

First-half operating expenses were $27.1 million, compared to $22.8 million during the same period in 2013. The increase reflects higher costs incurred to support growth, higher expense due to the impact of a weaker Canadian dollar on translation of US operating expenses and incremental costs related to the acquired HMI and Leland businesses. As a percentage of sales, first half operating expenses improved to 12.3% of sales, from 12.5% during the same period in 2013.

First-half EBITDA increased to $12.6 million, from $11.9 million during the same period in 2013.  The 6.4% gain reflects higher gross profit, partially offset by higher expenses. Profit for the period was $7.0 million, compared to $7.6 million during the same period in 2013, reflecting a $0.3 million increase in depreciation and amortization, a $0.5 million increase in net finance cost, and a $0.6 million increase in income tax expense, partially offset by the $0.8 million improvement in EBITDA.

Outlook

Hardwoods anticipates continued year-over-year sales growth through the second half of 2014 supported by the continued improvement in the US housing market, implementation of the Company's business strategies, the positive foreign exchange impact of a weaker Canadian dollar, and the addition of the HMI business, partially offset by a recent softening trend in prices for some hardwood lumber species.

The National Association of Homebuilders is calling for 1.038 million new housing starts in 2014, somewhat lower than previous estimates, but still up 12.3% over 2013. Renovation spending in the US is expected to rise 6.5% year over year according to the Home Improvement Research Institute, and non-residential construction is expected to increase 11.6% according to McGraw Hill Construction estimates.

In the Canadian market, 2014 housing starts are expected to remain unchanged from 2013 levels, while growth in the renovation and commercial construction markets is expected to be in line with inflation.

Hardwoods' focus in the second half will be on continuing to expand its US market share and successfully integrating the newly acquired HMI business. The Company is also actively pursuing its "Leverage Imports" and "Strengthen Commercial" strategies which focus on:

  • Growing sales of Hardwoods' high-quality proprietary import lines, supported both by the established quality assurance team located in Asia and new international sourcing initiatives designed to bring world-wide product solutions to Hardwoods' customers.

  • Capitalizing on significant opportunities in the commercial market. In particular, Hardwoods is actively growing its supply of first-tier product supply for commercial customers and capitalizing on its import capabilities to offer off-shore product solutions to the commercial sector to supplement domestic product solutions. 

Hardwoods' Board of Directors will continue to review the Company's financial performance and assess quarterly dividend payments on a regular basis. However in terms of cash utilization, the Company's primary focus in 2014 will remain on retaining the cash necessary to finance the significant market opportunity in the US and keeping the Company's balance sheet strong to support strategic acquisitions.

A more detailed discussion of the Company's financial performance can be found in its Management's Discussion and Analysis (MD&A) for the three and six month periods ended June 30, 2014. The MD&A will be posted, along with the Company's unaudited interim condensed consolidated financial statements on SEDAR (www.sedar.com) and on the Company's website (www.hardwoods-inc.com).

About Hardwoods Distribution Inc.

Hardwoods is one of North America's largest distributors of high-grade hardwood lumber, sheet goods and architectural millwork to the cabinet, moulding, millwork, furniture and specialty wood products industries. The Company currently operates a network of 33 distribution centers in the U.S. and Canada. 

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.  In addition to profit or loss, the Company considers EBITDA to be a useful supplemental measure of a company's ability to meet debt service and capital expenditure requirements, and the Company interprets trends in EBITDA as an indicator of relative operating performance. 

EBITDA is not an earnings measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS.  Investors are cautioned that EBITDA should not replace profit or loss or cash flows (as determined in accordance with IFRS) as an indicator of our performance.  The Company's method of calculating EBITDA may differ from the methods used by other issuers. Therefore, the Company's EBITDA may not be comparable to similar measures presented by other issuers. For a reconciliation between EBITDA and profit or loss as determined in accordance with IFRS, please refer to the discussion of Results of Operations described in section 3.0 of Management's Discussion and Analysis (MD&A) for the three and six months ended June 30, 2014.   

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. Such statements may involve, but are not limited to:  that Hardwoods anticipates that the newly acquired HMI business will generate approximately $33 million in additional revenues per year with opportunity to grow, provides cross-selling opportunities for Hardwoods established lines of import products, and expands upon the Company's value-added manufacturing capabilities; that HMI is a strong and strategic addition to the business, well-timed to the ongoing recovery in the US housing market; that Hardwoods ability to generate cash flow from operations has positioned the Company with a strong balance sheet to support future growth initiatives; that going forward, Hardwoods has a strong and experienced management team in place to continue running the business and executing the Company's well-established business strategy during CEO Lance Blanco's convalescence period; that Hardwoods anticipates continued year-over-year sales growth through the second half of 2014 supported by the continued improvement in the US housing market, implementation of the Company's business strategies, the positive foreign exchange impact of a weaker Canadian dollar, and the addition of the HMI business, partially offset by a recent softening trend in prices for some hardwood lumber species; that the National Association of Homebuilders is calling for 1.038 million new housing starts in 2014, somewhat lower than previous estimates, but still up 12.3% over 2013; that renovation spending in the US is expected to rise 6.5% year over year according to the Home Improvement Research Institute, and non-residential construction is expected to increase 11.6% according to McGraw Hill Construction estimates; that in the Canadian market, 2014 housing starts are expected to remain unchanged from 2013 levels, while growth in the renovation and commercial construction markets is expected to be in line with inflation; that Hardwoods' focus in the second half will be on continuing to expand its US market share and successfully integrating the newly acquired HMI business; that the Company will also actively pursuing its "Leverage Imports" and "Strengthen Commercial" strategies; that Hardwoods' Board of Directors will continue to review the Company's financial performance and assess quarterly dividend payments on a regular basis; and that in terms of cash utilization, the Company's primary focus in 2014 will remain on retaining the cash necessary to finance the significant market opportunity in the US and keeping the Company's balance sheet strong to support strategic acquisitions.

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: national and local business conditions; political or economic instability in local markets; competition; consumer preferences; spending patterns and demographic trends; legislation or governmental regulation; acquisition and integration risks.

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.

For further information: Rob Brown, Chief Financial Officer, Phone: (604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com, Website: http://www.hardwoods-inc.com