Hardwoods Announces Second Quarter 2016 Results

Achieves Second Quarter Profit of $5.4 million
Achieves Record Adjusted EBITDA
Declares Quarterly Dividend of $0.0625 per share

TRADING SYMBOL: Toronto Stock Exchange - HWD

LANGLEY, BC, Aug. 11, 2016 /CNW/ - Hardwoods Distribution Inc. ("Hardwoods" or the "Company") today announced strong financial results for the three-and-six months ended June 30, 2016.  Hardwoods is North America's largest wholesale distributor of high-grade hardwood lumber, specialty panels and interior architectural building materials, with a strong US and Canadian distribution network.

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

  • Second quarter revenue increased 9.5% year-over-year to $157.0 million.
  • Gross profit grew by 14.2% to $28.4 million and gross profit margin increased to 18.1% from 17.3%.
  • Second quarter Adjusted EBITDA increased 24.2% to a record $11.5 million; Adjusted EBITDA margin increased to 7.3% from 6.5% year-over-year.
  • Hardwoods generated profit of $5.4 million for the second quarter and Adjusted profit of $6.2 million, a 23.8% increase compared to Q2 2015.
  • The Board of Directors declared a quarterly dividend of $0.0625 per share. This is an increase of approximately 14% from the previous quarterly dividend of $0.055 per share.

Rugby Acquisition

On June 13, 2016 Hardwoods signed a definitive agreement to purchase substantially all of the assets used in the business of Rugby Architectural Building Products ("Rugby"), and assumed certain of Rugby's liabilities for a base purchase price of $138.8 million (US$107.0 million), plus up to another $16.9 million (US$13.0 million) based on future performance. The acquisition closed on July 15, 2016.

Rugby is a leading US wholesale distributor of non-structural architectural grade building products to customers that supply end-products to the commercial market. Rugby also serves industrial, retail, residential and institutional construction end-markets.  Rugby has a strong national US footprint, operating 30 strategically located distribution facilities that serve over 22,000 customers across 48 US states.

Transaction highlights include:

  • Establishing Hardwoods as the number one North American distributor of hardwood lumber, panel and interior architectural building materials;
  • Expanding our US geographic footprint with the addition of 15 distribution facilities located in the Eastern US where we did not previously have a presence;
  • Increasing our financial scale by adding a well run, profitable business;
  • Efficient use of our balance sheet for a transaction that is accretive to shareholders, with further upside expected from synergies;
  • Significantly increasing our presence in the commercial market from approximately 20% of our sales total to approximately 35%. This provides us with greater diversification of our sales mix which is a strategic priority for us;
  • Diversifies our customer and product concentration by adding 22,000 customers and 36,000 SKU's of branded and unbranded products sourced from a network of over 800 suppliers; and
  • Positions us for future US expansion and growth as Rugby has a robust acquisitions pipeline for future acquisitions which will enhance our ability to further execute on our acquisitions strategy.

The Rugby acquisition was financed by net proceeds from a recently completed bought deal share offering, a draw-down of our amended US credit facility, and the issuance of 563,542 common shares of Hardwoods to the sellers of Rugby.

"We achieved strong organic growth in the second quarter, including record Adjusted EBITDA, while laying the groundwork for significant future growth with our acquisition of Rugby Architectural Building Products," said Robert Brown, President and Chief Executive Officer of Hardwoods.  "Our second quarter results, which do not include a contribution from the Rugby operations as the transaction closed after the quarter end, were driven by successful execution of our "leverage import" and "strengthen commercial" business strategies, a different product mix, our ability to capitalize on product pricing opportunities, and by the benefits of a stronger US dollar."

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.

On the market front, second quarter US housing starts were relatively flat year-over-year based on information from the US Census Bureau, however, seasonally adjusted housing starts for the first half were up 9.0% to 1,156,000 year-over-year. This growth bodes well for demand later in 2016 as hardwood products are typically used 9-to-12 months after construction begins. In Canada, second quarter seasonally adjusted housing starts increased by 7.2% to 183,270 according to the Canada Housing and Mortgage Corporation.

Average hardwood lumber prices for the first six months of 2016, as measured by the Hardwood Review Kiln Dried Lumber Price Index, were down 4.0% compared to the same period in the prior year. Prices for panel products were generally stable year-over-year.

Cash provided by operating activities increased to $6.9 million in Q2 2016, from $2.1 million in the same period last year.  The $4.8 million improvement resulted from careful management of our balance sheet and the efficient growth of our business.  Adjusted EBITDA as a percentage of revenue increased to 7.3% in the second quarter and 6.7% in the first half of 2016, from 6.5% and 6.1% respectively in the same periods last year, reflecting the efficient operating performance of our business.

"Disciplined operational and financial management continue to be key factors in Hardwoods' positive performance," said Mr. Brown. "With the addition of Rugby, we are moving forward as the North American leader in our industry with approximately $1 billion in combined annual sales, a coast-to-coast US presence and a much stronger position in the commercial market. We look forward to continued growth in our base businesses and adding to the scope of our operations by utilizing our continuing financial strength."

Summary of Results


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







Three months

Three months

Six months

Six months


ended June 30

ended June 30

ended June 30

ended June 30


2016

2015

2016

2015

Total sales

$

157,031

$

143,351

$

314,444

$

278,467


Sales in the US (US$)

95,470

92,046

187,331

178,479


Sales in Canada

34,007

30,175

65,350

58,011

Gross profit

28,372

24,848

56,410

47,911


Gross profit %

18.1%

17.3%

17.9%

17.2%

Operating expenses

(18,887)

(16,215)

(38,242)

(32,203)

Profit from operating activities

9,485

8,633

18,168

15,708

Add: Depreciation and amortization

746

647

1,496

1,218

Earnings before interest, taxes, depreciation and






amortization ("EBITDA")

$

10,231

$

9,280

$

19,664

$

16,926


EBITDA as a % of revenue

6.5%

6.5%

6.3%

6.1%


Add (deduct):







Depreciation and amortization

(746)

(647)

(1,496)

(1,218)



Net finance income (expense)

(263)

(330)

(831)

(94)



Income tax expense

(3,855)

(3,294)

(7,348)

(5,892)

Profit for the period

$

5,367

$

5,009

$

9,989

$

9,722

Basic profit per share

$

0.32

$

0.30

$

0.60

$

0.58

Diluted profit per share

$

0.32

$

0.30

$

0.59

$

0.58

Average Canadian dollar exchange rate for one US dollar

$

1.29

$

1.23

$

1.33

$

1.24

 

 


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







Three months

Three months

Six months

Six months


ended June 30

ended June 30

ended June 30

ended June 30


2016

2015

2016

2015

Earnings before interest, taxes, depreciation and






amortization ("EBITDA"), per table above

$

10,231

$

9,280

$

19,664

$

16,926

Transaction expenses

1,292

1,292

Adjusted EBITDA

$

11,523

$

9,280

$

20,956

$

16,926

Adjusted EBITDA as a % of revenue

7.3%

6.5%

6.7%

6.1%






Profit for the period, as reported

$

5,367

$

5,009

$

9,989

$

9,722

Transaction expenses, net of tax

833

833

Adjusted profit for the period

$

6,200

$

5,009

$

10,822

$

9,722






Basic profit per share, as reported

$

0.32

$

0.30

$

0.60

$

0.58

Net impact of above items per share

0.05

0.05

Adjusted basic profit per share

$

0.37

$

0.30

$

0.65

$

0.58






Diluted profit per share, as reported

$

0.32

$

0.30

$

0.59

$

0.58

Net impact of above items per share

0.05

0.05

Adjusted diluted profit per share

$

0.37

$

0.30

$

0.64

$

0.58

 

Results from Operations - Three Months Ended June 30, 2016

For the three months ended June 30, 2016, total sales increased by 9.5% to $157.0 million from $143.4 million in Q2 2015. Hardwoods' US operations increased sales by 3.7% to US$95.5 million, reflecting higher demand and continued gains from the Company's efforts to leverage import products and to strengthen sales to commercial construction accounts.

Second quarter sales in Canada increased by 12.7%, year-over-year to $34.0 million. This growth reflects success in winning new business, overall higher product prices in Canada resulting from the stronger US dollar.

Second quarter gross profit increased to $28.4 million, up 14.2% from $24.8 million last year. This improvement reflects the higher sales revenue, paired with a higher gross profit margin of 18.1% compared to 17.3% last year.

Operating expenses for the three-month period ended June 30, 2016 were $18.9 million, compared to $16.2 million in Q2 2015.  This increase primarily reflects $1.3 million of expenses related to the Rugby acquisition, $0.7 million of higher expense due to the impact of a stronger US dollar on translation of US operating expenses, and $0.7 million of added costs to support organic growth. As a percentage of sales, quarterly operating expenses increased slightly to 12.0% from 11.3% during the same period in 2015.

Second quarter Adjusted EBITDA increased 24.2% to $11.5 million, from $9.3 million in Q2 2015. This gain reflects the increase in gross profit, partially offset by higher operating expenses (before expenses related to the Rugby acquisition and before an increase in depreciation and amortization). Profit for the period increased 7.1% to $5.4 million, from $5.0 million in 2015. The $0.4 million increase primarily reflects increase in EBITDA, partially offset by an increase in income tax expense. Adjusting profit for expenses related to the Rugby acquisition ("Adjusted profit"), Adjusted profit increased $1.2 million or 23.8% as compared to the same quarter in the previous year.

Results from Operations - Six Months Ended June 30, 2016

For the six months ended June 30, 2016, total sales increased by 12.9% to $314.4 million, from $278.5 million in the first half of 2015. Hardwoods' US operations increased sales by US$8.9 million, or 5.0%, reflecting higher demand and organic growth related to implementation of Hardwoods' strategic initiatives. First-half sales in Canada increased by $7.3 million, or 12.7%, year-over-year, reflecting organic growth and the positive impact of a stronger US dollar.

First-half gross profit increased 17.7% to $56.4 million, from $47.9 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 17.9%, from 17.2% during the same period last year.

First-half operating expenses increased to $38.2 million, from $32.2 million in the first six months of 2015. The increase reflects $2.0 million of higher expense due to the impact of a stronger US dollar on translation of US operating expenses, the $1.3 million of expenses related to the Rugby transaction and $2.7 million of added costs to support organic growth. As a percentage of sales, operating expenses increased slightly to 12.2% from 11.6% year-over-year.

First-half Adjusted EBITDA increased 23.8% to $21.0 million, from $16.9 million in 2015. The $4.0 million gain primarily reflects higher gross profit, partially offset by higher expenses (before expenses related to the Rugby acquisition and before an increase in depreciation and amortization). Profit for the six-month period increased to $10.0 million from $9.7 million during the first half of 2015. The $0.3 million improvement primarily reflects an increase in EBITDA, partially offset by an increase in income tax expense, net finance cost, and depreciation and amortization. Adjusted profit increased $1.1 million or 11.3% year-over-year.

Outlook

With the addition of the Rugby operations effective July 15, 2016, our geographic and end-market weighting will shift.  Going forward, approximately 90% of our sales will be transacted in the US (compared to 75% previously) and approximately 35% of our sales will be focused on the commercial market (up from 20% previously). While residential construction is expected to remain a key end-market for us, it will represent approximately 50% of our business going forward, 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 our business going forward.

Hardwoods' product mix will also expand 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, sinks and faucets, and industrial wood coatings.

Hardwoods expect that our gross profit margin as a percentage of sales will increase, reflecting the higher margin product mix carried by Rugby. Operating expenses are also expected to be moderately higher, reflecting Rugby's sales model which typically involves more orders to more customers, but with smaller average order sizes.

The outlook for Hardwoods' primary end-markets remains positive for the balance of 2016 and into 2017. In the US, job growth and income levels are gaining momentum and are helping propel a continuing recovery in the residential construction market. In the non-residential construction market, the American Institute of Architects predicts US growth of 8.2% in 2016, with the strongest gains anticipated in the commercial markets that Hardwoods focuses on.  Home improvement spending is also projected to pick up pace as housing markets continue their gradual recovery.

The outlook for the Canadian market remains neutral, with 2016 housing starts expected to remain consistent with 2015 levels and commercial construction expected to remain in line with inflation.

Industry forecasts predict hardwood lumber prices will generally remain 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 and composite panel products 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 our high-quality proprietary import lines, supported both by our 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, we continue to grow our supply of first-tier product supply for commercial customers. We are also capitalizing on our import capabilities to offer commercial customers an attractive and differentiated line-up of products.

Going forward, we will continue to pursue well-priced acquisition opportunities that support our 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 pipeline for future acquisitions in the United States.

Our Board will continue to review our financial performance and assess dividend levels on a regular basis. However, our primary focus in 2016 will be to retain the cash necessary to finance the significant market growth opportunity in the US and to keep our 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-and-six months ended June 30, 2016. The MD&A will be posted, along with the Company's interim financial statements, on SEDAR (www.sedar.com) and on the Company's website (www.hardwoods-inc.com) on or before August 11, 2016.

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 62 distribution centres, as well as 1 sawmill and kiln drying operation.

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.  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: Growth in US residential construction bodes well for demand later in 2016 as hardwood products are typically used 9-to-12 months after construction begins; "we achieved strong organic growth in the second quarter, including record Adjusted EBITDA, while laying the groundwork for significant future growth with our acquisition of Rugby Architectural Building Products"; we expect that our gross profit margin as a percentage of sales will increase, reflecting the higher margin product mix carried by Rugby; operating expenses are also expected to be moderately higher, reflecting Rugby's sales model; the outlook for Hardwoods' primary end-markets remains positive for the balance of 2016 and into 2017; in the US, job growth and income levels are gaining momentum and are helping propel a continuing recovery in the residential construction market; in the non-residential construction market, the American Institute of Architects predicts US growth of 8.2% in 2016, with the strongest gains anticipated in the commercial markets that Hardwoods focuses on; home improvement spending is also projected to pick up pace as housing markets continue their gradual recovery; the outlook for the Canadian market remains neutral, with 2016 housing starts expected to remain consistent with 2015 levels and commercial construction expected to remain in line with inflation; industry forecasts predict hardwood lumber prices will generally remain 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 and composite panel products are expected to remain steady;

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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