Hardwoods Announces Record Third Quarter 2016 Results

Achieves sales of $235.4 million and EBITDA of $13.2 million
Declares Quarterly Dividend of $0.0625 per share

TRADING SYMBOL: Toronto Stock Exchange - HWD

LANGLEY, BC, Nov. 8, 2016 /CNW/ - Hardwoods Distribution Inc. ("Hardwoods" or the "Company") today announced strong financial results for the three and nine months ended September 30, 2016.  Hardwoods is North America's largest wholesale distributor of high-grade hardwood lumber, specialty panels and non-structural architectural building materials, with a comprehensive US and Canadian distribution network.

  Highlights (For the three months ended September 30, 2016)

  • Completed on July 15, 2016 the previously announced acquisition of Rugby Architectural Building Products ("Rugby") for a purchase price of US$107 million;
  • Third quarter revenue increased 54.8% year-over-year to $235.4 million;
  • Gross profit grew by 64.0% to $43.8 million and gross profit margin increased to 18.6% from 17.6%;
  • Third quarter adjusted EBITDA increased 39.6% to $14.3 million;
  • Hardwoods generated third quarter profit of $7.3 million and adjusted profit of $8.1 million, a 22.4% and 35.6% increase respectively compared to Q3 2015;
  • Diluted profit per share was flat however adjusted diluted profit per share increased 11.4% to $0.39 per share; and
  • The Board of Directors declared a quarterly dividend of $0.0625 per share, payable January 31, 2017 to shareholders of record as at January 20, 2016.

Rugby Acquisition

  • Financial results for the three months and nine months ended September 30, 2016, included approximately two and a half months of financial contribution from Rugby;
  • Rugby is a leading US wholesale distributor of non-structural architectural grade building products to customers that supply end-products to the commercial market; and
  • Rugby has a strong national US footprint operating 30 strategically located facilities that serve over 22,000 customers across 48 US states.

"We generated significant top and bottom line growth in the third quarter and first nine months of 2016 as contribution from our new Rugby operations positively impacted our results," said Rob Brown, President and Chief Executive Officer of Hardwoods.

Hardwoods' results further benefited from organic sales growth year to date as the Company continued to implement our business strategies. Foreign exchange was also a factor in Hardwoods' performance, but affected the two periods differently. Results for the three months ended September 30, 2016 were negatively impacted by the year-over-year decrease in the value of the US dollar compared to the Canadian dollar, while nine-month results were positively impacted by a strengthening in the average value of the US dollar during that period. A stronger US dollar benefits the Company by: i) increasing the value of sales and profits earned in the US operations when translated into Canadian dollars for financial reporting purposes; ii) increasing the selling price of US dollar-denominated products sold to Hardwoods' Canadian customers; and iii) improving the export competitiveness of the Company's Canadian industrial customers, many of whom have the capability to sell their manufactured products in the US.

Hardwoods' results were achieved against a backdrop of mixed market conditions. Based on information from the US Census Bureau, the seasonally adjusted rate of US residential housing starts for the third quarter decreased slightly to 1,138,000, from 1,163,000 in the same quarter last year, but rose slightly on a nine-month basis. The non-residential construction market showed greater momentum with the value of non-residential projects by the private sector rising 7.6% on a year-to-date basis to August 2016. Hardwood lumber prices in the first nine months of 2016 were down 5% according to Hardwood Review's Kiln Dried Lumber Price Index. Prices for panel products remained generally stable year-over-year.

"We are pleased with initial results from our new Rugby operations. As anticipated, the acquisition is underpinning stronger performance from the business as a whole, even during a period of mixed market conditions," said Mr. Brown. "Hardwoods is moving forward as a larger, stronger, and more diversified company with many new opportunities to continue expanding our business, particularly in the commercial market."

Outlook

With the addition of the Rugby operations effective July 15, 2016, Hardwoods' geographic and end-market weighting has shifted. Going forward, over 90% of the Company's sales will be transacted in the US (compared to approximately 75% previously) and approximately 35% of sales will be focused on the commercial end-market (up from 20% previously). While residential construction remains a key end-market for Hardwoods, it now represents approximately 50% of the Company's business, compared to 60% previously.  Other markets such as home renovation, recreational vehicles, custom motor coaches, yacht interiors and other specialty areas are expected to comprise 15% of the Company's business going forward.

Hardwoods' product mix has also expanded with the addition of Rugby's product offerings. These include a broad range of hardwood plywood, composite panels, solid surface countertops, post-form countertops, high-pressure laminate, interior and exterior doors and millwork, hardwood lumber, cabinet hardware, mouldings, and industrial wood coatings.

Hardwoods expects that its gross margin as a percentage of sales will remain above the levels Hardwoods traditionally achieved, reflecting Rugby's higher-margin product mix. Operating expenses are also expected to be moderately higher as a result of Rugby's sales model. As a result, we expect EBITDA as a percentage of revenue to be less than the levels the Company has historically experienced.

The multi-year outlook for our primary end-markets remains positive. While the US residential construction market has experienced some unevenness in 2016, market fundamentals remain sound. In the US, job growth and income levels are gaining momentum and are expected to  propel the continued gradual recovery in the residential construction market. Harvard's Joint  Center for Housing Studies report on "state of the nations housing" concluded that housing construction should average at least 1.6 million units a year over the next decade in order to replace older units and meet demand. With average housing starts at 1.2 million in the third quarter, there is considerable room for growth in this market. The Company is well positioned to capture this growth with approximately 50% of our business focused on products that end up in residential construction.

Industry forecasts predict prices for hardwood lumber will remain generally soft through the balance of 2016 as increased supply works its way through the market and demand from export markets remains less predictable. Prices for hardwood plywood, composite panel, and sheet goods are expected to remain steady.

Strategically, Hardwoods will continue to implement its "leverage imports" and "strengthen commercial" strategies, while also capitalizing on the numerous opportunities created by the Rugby acquisition. Key areas of focus will include:

  • growing sales of high-quality proprietary import lines, supported both by Hardwoods' established international quality assurance team and new international sourcing initiatives designed to bring world-wide product solutions to our customers; and
  • capitalizing on significant opportunities in the commercial market. In particular, Hardwoods will continue to grow its supply of first-tier product supply for commercial customers. The Company is also capitalizing on its import capabilities to offer commercial customers an attractive and differentiated line-up of products.

Going forward, Hardwoods will continue to pursue well-priced acquisition opportunities that support its strategies, taking advantage of the expanded range of opportunities provided by the Rugby acquisition. Rugby management has successfully completed and integrated 17 acquisitions since 2009, and has identified a significant pipeline for future acquisitions in the United States.

The Board will continue to review Hardwoods' financial performance and assess dividend levels on a regular basis. However, the primary focus will be to retain the cash necessary to finance the significant market growth opportunity in the US and to keep the Company's balance sheet strong, reduce debt and support future strategic acquisitions.

A more detailed discussion of the Company's financial performance can be found in Hardwoods' Management's Discussion and Analysis (MD&A) for the three months ended September 30, 2016. The MD&A will be posted, along with the Company's audited financial statements, on SEDAR (www.sedar.com) and on the Company's website (www.hardwoods-inc.com).

Summary of Results


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







Three months

Three months

Nine months

Nine months


ended

ended

ended

ended


September 30

September 30

September 30

September 30


2016

2015

2016

2015

Total sales

$

235,428

$

152,114

$

549,872

$

430,581


Sales in the US (US$)

155,206

92,861

342,537

271,340


Sales in Canada

32,909

30,736

98,259

88,747

Gross profit

43,845

26,734

100,255

74,645


Gross profit %

18.6%

17.6%

18.2%

17.3%

Operating expenses

(31,844)

(17,180)

(70,086)

(49,383)

Profit from operating activities

12,001

9,554

30,169

25,262

Add: Depreciation and amortization

1,185

673

2,681

1,891

Earnings before interest, taxes, depreciation and







amortization ("EBITDA")

$

13,186

$

10,227

$

32,850

$

27,153


EBITDA as a % of revenue

5.6%

6.7%

6.0%

6.3%


Add (deduct):







   Depreciation and amortization


(1,185)

(673)

(2,681)

(1,891)


   Net finance income (expense)

34

154

(797)

60


   Income tax expense

(4,739)

(3,745)

(12,087)

(9,637)

Profit for the period

$

7,296

$

5,963

$

17,285

$

15,685

Basic profit per share

$

0.35

$

0.36

$

0.96

$

0.94

Diluted profit per share

$

0.35

$

0.35

$

0.95

$

0.93

Average Canadian dollar exchange rate for one US dollar

$

1.30

$

1.31

$

1.32

$

1.26












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









Three months

Three months

Nine months

Nine months


ended

ended

ended

ended


September 30

September 30

September 30

September 30


2016

2015

2016

2015

Earnings before interest, taxes, depreciation and





amortization ("EBITDA"), per table above

$

13,186

$

10,227

$

32,850

$

27,153

Transaction expenses

1,094

2,386

Adjusted EBITDA

$

14,280

$

10,227

$

35,236

$

27,153

Adjusted EBITDA as a % of revenue

6.1%

6.7%

6.4%

6.3%






Profit for the period, as reported

$

7,296

$

5,963

$

17,285

$

15,685

Transaction expenses, net of tax

788

1,611

Adjusted profit for the period

$

8,084

$

5,963

$

18,896

$

15,685






Basic profit per share, as reported

$

0.35

$

0.36

$

0.96

$

0.94

Net impact of above items per share

0.04

0.09

Adjusted basic profit per share

$

0.39

$

0.36

$

1.05

$

0.94






Diluted profit per share, as reported

$

0.35

$

0.35

$

0.95

$

0.93

Net impact of above items per share

0.04

0.09

Adjusted diluted profit per share

$

0.39

$

0.35

$

1.04

$

0.93

 

Results from Operations - Three Months Ended September 30, 2016

For the three months ended September 30, 2016, total sales increased by 54.8% to $235.4 million, from $152.1 million in Q3 2015. Hardwoods' US operations increased sales by 67.1% to US$155.2 million, reflecting the addition of Rugby. Third quarter sales in Canada increased by 7.1%, year-over-year to $32.9 million. This growth reflects success in winning new business.

Third quarter gross profit increased to $43.8 million, up 64.0% from $26.7 million last year. This improvement reflects the higher sales revenue, paired with a higher gross profit margin of 18.6% compared to 17.6% last year. This increase primarily reflects our ability to capitalize on product pricing opportunities and the higher gross profit margin realized by the Rugby operations.

Operating expenses for the three-month period ended September 30, 2016 were $31.8 million, compared to $17.2 million in Q3 2015.  This $14.7 million increase primarily reflects Rugby operating expenses of $12.8 million, $1.1 million of expense related to the Rugby acquisition, and $0.9 million of added cost to support organic growth, partially offset by a $0.2 million reduction in expenses due to the impact of a year-over-year weakening of the US dollar on translation of US operating expenses. As a percentage of sales, third quarter expenses increased to 13.5% from 11.3% last year. This increase primarily reflects Rugby's higher ratio of operating expenses as a percentage of sales.

Third quarter Adjusted EBITDA increased 39.6% to $14.3 million, from $10.2 million in Q3 2015. This gain reflects the increase in gross profit, partially offset by higher expenses.  Profit for the period increased 22.4% to $7.3 million, from $6.0 million in 2015. The $1.3 million increase primarily reflects the $3.0 million increase in EBITDA, partially offset by a $1.0 million increase in income tax expense, and a $0.5 million increase in depreciation and amortization.

Results from Operations - Nine Months Ended September 30, 2016

For the nine months ended September 30, 2016, total sales increased by 27.7% to $549.9 million, from $430.6 million in the same period in 2015. Of the $119.3 million year-over-year increase, $81.6 million was due to the addition of Rugby's operations and $20.5 million was due to organic growth. Nine-month sales results also benefited from the $17.2 million positive impact of a stronger US dollar when translating US sales to Canadian dollars for reporting purposes.

Hardwoods' US operations increased sales by 26.2% to US $342.5 million, reflecting the addition of Rugby sales, higher demand and organic growth related to implementation of Hardwoods' strategic initiatives. Year-to-date sales in Canada increased by $9.5 million, or 10.7%, year-over-year, reflecting organic growth and the positive impact of a stronger US dollar.

Nine-month gross profit increased 34.3% to $100.3 million, from $74.6 million last year. This gain reflects the combination of increased sales and a higher gross profit margin. As a percentage of sales, gross profit margin increased to 18.2%, from 17.3% during the same period last year. The increase in gross profit margin reflects our ability to capitalize on product pricing opportunities and the acquisition of Rugby which generates a higher gross profit margin than our traditional business.

Operating expenses for the first nine months of 2016 increased to $70.1 million, from $49.4 million during the same period in 2015. The increase reflects $12.8 million of Rugby operating expenses, $2.4 million of transaction expense related to the Rugby acquisition, a $2.6 million increase in expense due to the impact of a stronger US dollar on translation of US operating expenses, and $2.9 million of added costs to support organic growth. As a percentage of sales, operating expenses increased to 12.7% from 11.5% year-over-year. This increase primarily reflects Rugby's higher ratio of operating expenses as a percentage of sales.

Nine-month Adjusted EBITDA increased 29.8% to $35.2 million, from $27.2 million in 2015. The $8.1 million gain primarily reflects higher gross profit, partially offset by increased operating expenses (before expenses related to the Rugby acquisition and before an increase in depreciation and amortization).

Profit for the nine-month period increased to $17.3 million from $15.7 million during the first nine months of 2015. The $1.6 million improvement reflects the $5.7 million increase in EBITDA, partially offset by the $2.5 million increase in income tax expense, a $0.9 million increase in net finance cost, and a $0.8 million increase in depreciation and amortization. Profit, adjusted for expenses related to the Rugby acquisition, net of tax, increased to $18.9 million, a $3.2 million or 20.5% increase compared to the same period last year.

About Hardwoods Distribution Inc.

Hardwoods is North America's largest distributors of high-grade hardwood lumber, sheet goods, architectural millwork and non-structural architectural grade building products to the residential and commercial construction markets. The Company operates a North American network of 60 distribution centres, as well as 1 sawmill and kiln drying operation.

Non-GAAP Measures

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, we discuss certain EBITDA Ratios, such as EBITDA margin (being EBITDA as a percentage of revenues).  In addition to profit, we consider EBITDA and EBITDA Ratios to be useful supplemental measures of the Company's ability to meet debt service and capital expenditure requirements, and we interpret 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. 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. The aforementioned adjusted measures are collectively referenced as "the Adjusted Measures". We consider 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.  Our method of calculating the Non-GAAP Measures may differ from the methods used by other issuers. Therefore, our 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. Such statements may involve, but are not limited to: Hardwoods is moving forward as a larger, stronger, diversified company with many new opportunities to continue expanding our business, particularly in the commercial market; going forward, over 90% of the Company's sales will be transacted in the US (compared to approximately 75% previously) and approximately 35% of sales will be focused on the commercial end-market (up from 20% previously); other markets such as home renovation, recreational vehicles, custom motor coaches, yacht interiors and other specialty areas are expected to comprise 15% of the Company's business going forward; Hardwoods expects that its gross margin as a percentage of sales will remain above the levels Hardwoods traditionally achieved, reflecting Rugby's higher-margin product mix; operating expenses are also expected to be moderately higher as a result of Rugby's sales model; we expect EBITDA as a percentage of revenue to be less than the levels the Company has historically experienced; the multi-year outlook for our primary end-markets remains positive; in the US, job growth and income levels are gaining momentum and are expected to  propel the continued gradual recovery in the residential construction market; Harvard's Joint  Center for Housing Studies report on "state of the nations housing" concluded that housing construction should average at least 1.6 million units a year over the next decade in order to replace older units and meet demand, and with average housing starts at 1.2 million in the third quarter, there is considerable room for growth in this market; the Company is well positioned to capture this growth with approximately 50% of our business focused on products that end up in residential construction; industry forecasts predict prices for hardwood lumber will remain generally soft through the balance of 2016 as increased supply works its way through the market and demand from export markets remains less predictable; prices for hardwood plywood, composite panel, and sheet goods are expected to remain steady; going forward, Hardwoods will continue to pursue well-priced acquisition opportunities that support its strategies, taking advantage of the expanded range of opportunities provided by the Rugby acquisition.

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, Hardwoods 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: Faiz Karmally, Chief Financial Officer, Phone: (604) 881-1982, Email: fkarmally@hardwoods-inc.com, Website: http://www.hardwoods-inc.com

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