ADENTRA Announces First Quarter 2023 Results

First quarter 2023 sales at US$579.9 million and earnings per share of US$0.43
Cash flow from operations grows by US$100.0 million year-over-year
Declares dividend of C$0.13 per share

LANGLEY, BC, May 11, 2023 /CNW/ - ADENTRA Inc. ("ADENTRA" or the "Company") today announced financial results for the three months ended March 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 currently operate a network of 86 facilities in the United States and Canada. All amounts are shown in United States dollars ("U.S. $" or "$"), unless otherwise noted.

Financial Highlights for Q1 2023

• Generated sales of $579.9 million (C$783.6 million), a 10.1% decrease from Q1 2022. The change in sales includes a 13.8% decrease in organic sales primarily driven by lower volumes, partially offset by a 4.1% contribution from acquisitions
• Gross profit was $117.0 million, representing a gross margin percentage of 20.2%
• Operating expenses as a percentage of sales were 15.9%, and grew by just $3.4 million organically, or 4.0%, despite higher inflationary conditions prevalent in the economy
• Adjusted basic earnings per share were $0.48 (C$0.65), and Adjusted EBITDA was $42.9 million (C$58.0 million)
• Cash flow from operating activities was $69.8 million (C$94.3 million). Net bank debt decreased $42.9 million
• Ended the quarter with a strong balance sheet and a Leverage Ratio of 2.6 times

"We achieved a solid start to our 2023 year as we demonstrated the strength of our strategies and business model in a more challenging economic environment," said Rob Brown, ADENTRA's President and CEO. "Our positive first quarter results were supported by our balanced business platform, which includes significant diversification of end-markets, customer channels, product categories, and geographic coverage. These attributes we believe have generally supported pricing for our products, which is flat year-on-year."   

"We also continued to demonstrate our business's ability to generate significant cash flows, both from the predictable conversion of Adjusted EBITDA to operating cash flow before changes in working capital, and from the release of working capital during periods of reduced economic activity. First quarter cash flow from operating activities grew to $69.8 million, representing a year-over-year increase of $100.0 million, and supported by a decrease in inventory in the first quarter of $49.1 million. We put this capital to work to enhance shareholder value, including financing the purchase of Rojo Distributors, repurchasing almost 2% of our issued and outstanding shares, announcing a quarterly dividend of C$0.13 per share, and paying down net bank debt by $42.9 million in the quarter."

"As we move forward, we will continue to closely monitor changing economic conditions and the impacts that recent 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 continue to see a long runway of 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," said Mr. Brown.

Outlook

Previous inflation and interest rate hikes are expected to have a continued near-term negative impact on economic activity. This, in turn, is resulting in a moderation of demand for our products and could lead to softer product pricing and volumes as compared to our 2022 experience. As a result we expect our 2023 financial performance will not be as strong as the record-setting levels achieved last year.

As we have demonstrated in previous business cycles and most recently in Q1 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 will continue to convert 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 we anticipate a return to robust demand levels, 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 this year following two years of higher-than-normal growth. The Joint Center for Housing Studies of Harvard University anticipates a decrease of 2.8% for the U.S. repair and remodel market by the fourth quarter of 2023. 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 fiscal 2023.

In the residential construction market (~40% of sales), new building starts decreased 17% in March 2023 as compared to March 2022 as affordability headwinds weigh on consumers. 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 goals and financial KPI's can be found in the investor presentation on our website.  

Q1 2023 Investor Call

ADENTRA will hold an investor call on Friday May 12, 2023 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-888-664-6392 or [phone] (GTA) at least five minutes before the call begins. A replay will be available through May 26, 2023 by calling toll free 1-888-390-0541 or [phone] (GTA), followed by passcode 233854.

Summary of Results

	Three months		Three months
	ended March 31		ended March 31
	2023		2022
Total sales	$                579,857		$                644,883
Sales in the US	536,184		591,222
Sales in Canada (CAD$)	59,068		68,067
Gross profit	116,993		147,781
Gross profit %	20.2 %		22.9 %
Operating expenses	(92,428)		(84,772)
Income from operations	$                 24,565		$                 63,009
Add: Depreciation and amortization	17,018		15,205
Earnings before interest, taxes, depreciation and
amortization ("EBITDA")	$                 41,583		$                 78,214
EBITDA as a % of revenue	7.2 %		12.1 %
Add (deduct):
Depreciation and amortization	(17,018)		(15,205)
Net finance expense	(12,219)		(5,382)
Income tax expense	(2,749)		(14,140)
Net income for the period	$                   9,597		$                 43,487
Basic earnings per share	$                     0.43		$                     1.83
Diluted earnings per share	$                     0.42		$                     1.82
Average US dollar exchange rate for one Canadian dollar	$                   0.739		$                   0.790

	Three months		Three months
	ended March 31		ended March 31
	2023		2022
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per table above	$                 41,583		$                 78,214
LTIP expense	1,286		695
Transaction expense	—		892
Adjusted EBITDA	$                 42,869		$                 79,801
Adjusted EBITDA as a % of revenue	7.4 %		12.4 %
Net income for the period, as reported	$                   9,597		$                 43,487
Adjustments, net of tax	1,172		1,250
Adjusted net income for the period	$                 10,769		$                 44,737
Basic earnings per share, as reported	$                     0.43		$                     1.83
Net impact of above items per share	0.05		0.05
Adjusted basic earnings per share	$                     0.48		$                     1.88
Diluted earnings per share, as reported	$                     0.42		$                     1.82
Net impact of above items per share	0.05		0.05
Adjusted diluted earnings per share	$                     0.47		$                     1.87

Results from Operations - Three Months Ended March 31, 2023

For the three months ended March 31, 2023, we generated total sales of $579.9 million, as compared to $644.9 million in the same period in 2022. The $65.0 million, or 10.1%, decrease in sales was primarily the result of a $88.7 million reduction in organic sales, partially offset by $26.4 million of incremental revenue contribution from a full three months of Mid-Am's results in Q1 2023, as compared to just under two months' contribution in the same period last year.  An unfavorable foreign exchange impact related to the translation of Canadian sales to US dollars for reporting purposes accounted for the remaining $3.0 million of sales impact. 

First quarter sales from our U.S. operations were $536.2 million, as compared to $591.2 million in the same period in 2022. The $55.0 million, or 9.3%, decrease reflects a primarily volume-driven $81.7 million reduction in organic sales, partially offset by $26.4 million in incremental revenue from a full quarter of Mid-Am's results and $0.3 million of sales contributed from our recent acquisition of Rojo.

In Canada, first quarter sales of C$59.1 million were C$9.0 million, or 13.2%, lower than the same period in 2022. The year-over-year change in Canadian sales primarily reflects a decrease in volumes.

We generated first quarter gross profit of $117.0 million, as compared to $147.8 million in the same period last year. The $30.8 million, or 20.8%, year-over-year decrease reflects lower organic sales and a gross profit percentage of 20.2%, as compared to 22.9% in Q1 2022. Our gross profit percentage from the prior-year period was temporarily elevated due to favorable market dynamics, including strong demand and tight supply.

For the three months ended March 31, 2023, operating expenses increased by $7.7 million to $92.4 million, from $84.8 million in the same period last year. As a percentage of sales, operating expenses were 15.9%, as compared to 13.1% in the same period last year. 

The $7.7 million increase in operating expenses includes $3.3 million related to incremental operating expenses from the inclusion of a full quarter's results of Mid-Am, $1.0 million of amortization on intangible assets acquired in connection with the Mid-Am acquisition, and $3.4 million relating to organic increase in operating expenses.

For the three months ended March 31, 2023, depreciation and amortization increased to $17.0 million, from $15.2 million in Q1 2022. This $1.8 million increase primarily relates to the operations of the Mid-Am business for a full quarter and is comprised of $1.0 million of amortization for acquired intangible assets and $0.5 million from depreciation related to operations during the period.

For the three months ended March 31, 2023, net finance expense increased to $12.2 million, from $5.4 million in the same period last year. This increase was primarily driven by higher interest rates on bank indebtedness.

For the three months ended March 31, 2023, income tax expense was $2.7 million compared to $14.1 in the same period in 2022, primarily reflecting lower taxable income and the benefit of tax restructuring. 

We generated Adjusted EBITDA of $42.9 million in Q1 2023, as compared to $79.8 million during the same period in 2022. The $36.9 million, or 46%, change was driven primarily by the $30.8 million decrease in gross profit and the $6.1 million increase in operating expenses (before changes in depreciation and amortization, LTIP expense, and transaction expenses).

Net income for the first quarter of 2023 was $9.6 million, as compared to $43.5 million in Q1 2022. The $33.9 million, or 78%, decrease primarily reflects $36.6 million lower EBITDA, the $1.8 million increase in depreciation and amortization, and the $6.8 million increase in net finance expense, partially offset by the $11.4 million decrease in income tax expense.

For the three months ended March 31, 2023, we generated basic earnings per share of $0.43, as compared to $1.83 in Q1 2022. Adjusted net income was $10.8 million, as compared to $44.7 million in Q1 2022, and  Adjusted diluted earnings per share were $0.47, as compared to $1.87 in Q1 2022.

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.

Non-GAAP and other Financial Measures

In this news release, reference is made to the following non-GAAP financial measures:

• "Adjusted EBITDA" is EBITDA before long term incentive plan ("LTIP") expense, professional fees and transaction expenses. We believe Adjusted EBITDA is a useful supplemental measure for investors, and is used by management, for evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
• "Adjusted net income" is net income before LTIP expense, professional fees and transaction expenses. We believe adjusted profit is a useful supplemental measure for investors, and is used by management, for evaluating our profitability, our ability to meet debt service and capital expenditure requirements, our ability to generate cash flow from operations, and as an indicator of relative operating performance.
• "EBITDA" is earnings before interest, income taxes, depreciation and amortization, where interest is defined as net finance income (expense) as per the consolidated statement of comprehensive income. We believe EBITDA is a useful supplemental measure for investors, and is used by management, for evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
• "Organic growth" and "acquisition-based growth" consists of quantifying the change in total sales as either related to organic growth or acquisition-based growth, or the impact of foreign exchange related to the translation of Canadian sales to U.S. dollars. Total sales earned by acquired companies in the first 12 months following an acquisition is reported as acquisition-based growth and thereafter as organic growth. Organic growth excludes the impact of acquisitions and foreign exchange impact related to the translation of Canadian sales to U.S. dollars. From time to time, we also quantify the impacts of certain unusual events to organic growth to provide useful information to investors to help better understand our financial results.

In this news release, reference is also made to the following non-GAAP ratios: "adjusted basic earnings per share", "adjusted diluted earnings per share", "Adjusted EBITDA margin" and "Leverage Ratio". For a description of the composition of each non-GAAP ratio and how each non-GAAP ratio provides useful information to investors and is used by management, see "Non-GAAP and Other Financial Measures" in the Company's management's discussion and analysis for the year ended December 31, 2022 (which is incorporated by reference herein).

Such non-GAAP financial measures and non-GAAP ratios are not standardized financial measures under International Financial Reporting Standards ("IFRS") and might not be comparable to similar financial measures disclosed by other issuers. For reconciliation between non-GAAP measures and the most directly comparable financial measure in our financial statements, please refer to the "Summary of Results".

Forward-Looking Statements

Certain statements in this press release contain forward-looking information within the meaning of applicable securities laws in Canada ("forward-looking information"). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.

The forward-looking information in this press release includes, but is not limited to: our goal to grow sales to $3.5 billion by 2026 (run-rate); our intention is to build a highly sustainable future for ADENTRA and our stakeholders; our expectations regarding our ability to deliver growth and profitability; our expectations regarding future economic conditions and industry trends; our ability to generate cash flow; we expect reduced financial performance in 2023 as compared to the record setting levels achieved in 2022; our intention to effectively manage our business and cash flows; expected demand for our products; our plans to grow our business through organic growth and acquisitions; and, expected future dividends and considerations as to the payment of any future dividends.

The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: there are no material exchange rate fluctuations between the Canadian and U.S. dollar that affect our performance; the general state of the economy does not worsen; we do not lose any key personnel; there is no labor shortage across multiple geographic locations; there are no circumstances, of which we are aware that could lead to the Company incurring costs for environmental remediation; there are no decreases in the supply of, demand for, or market values of our products that harm our business; we do not incur material losses related to credit provided to our customers; our products are not subjected to negative trade outcomes; we are able to sustain our level of sales and earnings margins; we are able to grow our business long term and to manage our growth; we are able to integrate acquired businesses; there is no new competition in our markets that leads to reduced revenues and profitability; we can comply with existing regulations and will not become subject to more stringent regulations; no material product liability claims; importation of components or other innovative products does not increase and replace products manufactured in North America; our management information systems upon which we are dependent are not impaired; we are not adversely impacted by disruptive technologies; an outbreak or escalation of a contagious disease does not adversely affect our business; and, our insurance is sufficient to cover losses that may occur as a result of our operations.

The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. The factors which could cause results to differ from current expectations include, but are not limited to: exchange rate fluctuations between the Canadian and U.S. dollar could affect our performance; our results are dependent upon the general state of the economy; impacts of COVID-19, further mutations thereof or other outbreaks of disease, could have significant impacts on our business; we depend on key personnel, the loss of which could harm our business; a labour shortage across multiple geographic locations could harm our business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm our business; we may incur losses related to credit provided to our customers; our products may be subject to negative trade outcomes; we may not be able to sustain our level of sales or earnings margins; we may be unable to grow our business long term or to manage any growth; we are unable to integrate acquired businesses; competition in our markets may lead to reduced revenues and profitability; we may fail to comply with existing regulations or become subject to more stringent regulations; product liability claims could affect our revenues, profitability and reputation; importation of components or other innovative products may increase, and replace products manufactured in North America; disruptive technologies could lead to reduced revenues or a change in our business model; we are dependent upon our management information systems; disruptive technologies could lead to reduced revenues or a change in our business model; our information systems are subject to cyber securities risks; our insurance may be insufficient to cover losses that may occur as a result of our operations; an outbreak or escalation of a contagious disease may adversely affect our business; our credit facility affects our liquidity, contains restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by us and certain of our subsidiaries; the market price of our Shares will fluctuate; there is a possibility of dilution of existing Shareholders; and, other risks described in our annual information form and in our management's discussion and analysis for the year ended December 31, 2022, each of which are available on the Company's profile at www.sedar.com.

This news release contains information that may constitute a "financial outlook" within the meaning of applicable securities laws. The financial outlook has been approved by management as of the date of this news release. The financial outlook is provided for the purpose of providing readers with an understanding of the Company's anticipated financial performance. Readers are cautioned that the information contained in the financial outlook may not be appropriate for other purposes.

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, we undertake no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof. 

Third-Party Information

Certain information contained in this news release includes market and industry data that has been obtained from or is based upon estimates derived from third-party sources, including industry publications, reports and websites. Although the data is believed to be reliable, we have not independently verified the accuracy, currency or completeness of any of the information from third-party sources referred to in this news release or ascertained from the underlying economic assumptions relied upon by such sources. We hereby disclaim any responsibility or liability whatsoever in respect of any third-party sources of market and industry data or information.

SOURCE ADENTRA Inc.

Ian Tharp - Investor Relations, Phone: [phone], Email: [email protected], Website:www.adentragroup.com