Achieves Record Annual Sales, Profit, and
EBITDA
Declares Quarterly Dividend of $0.0725 per share
TRADING SYMBOL: Toronto Stock Exchange - HDI
LANGLEY, BC, March 15, 2018 /CNW/ - Hardwoods Distribution
Inc. ("HDI" or the "Company") today announced financial results for
the three months and full year ended December 31, 2017. HDI is North America's largest wholesale distributor
of architectural grade building products to the residential and
commercial construction markets, with a strong US and Canadian
distribution network.
Highlights (For the three and twelve months ended
December 31, 2017)
- Generated full-year revenue of $1.0
billion, an increase of 31.4% from 2016. This included
acquisition-based growth of 28.4% and organic sales growth of
4.7%.
- Profit increased 25.5% to $30.0
million in 2017. Diluted profit per share grew to
$1.39, from $1.25 in 2016, an increase of 11.2%.
- 2017 EBITDA climbed 27.2% to $55.6
million, while Adjusted EBITDA increased 22.0% to
$56.3 million.
- Completed two acquisitions during 2017, adding four locations
and annual revenues of approximately $35
million going forward.
- Fourth quarter revenues include acquisition-based growth of
3.2% and organic growth of 4.4%.
- Generated fourth quarter profit of $4.9
million and EBITDA of $11.0
million, compared to $6.6
million and $10.9 million
respectively in Q4 2016. Fourth quarter profit and EBITDA were
negatively affected by the Trade Case (see Trade Case section) and
a one-time charge for revaluing deferred tax assets due to US tax
reform (see Outlook section).
- The Board of Directors approved a quarterly dividend of
$0.0725 per share, payable on
April 27, 2018 to shareholders of
record as at April 16, 2018.
"Our annual sales exceeded $1
billion for the first time in our history, and we generated
record profit and EBITDA in 2017," said Rob
Brown, President and CEO of HDI. "We accomplished these
results against the backdrop of mixed market conditions as the US
residential construction market experienced uneven and relatively
slow growth, and the US trade case against hardwood plywood from
China that impacted our gross
margins in the second half of the year."
Trade Case
As previously announced, on November 18,
2016, a trade case was filed in the US seeking the
imposition of countervailing duties ("CVD") and antidumping duties
("AD") against imported hardwood plywood produced in China.
On April 19, 2017 the Department of
Commerce ("Commerce") announced a preliminary CVD of 9.89%, and on
June 20, 2017 Commerce announced a
preliminary AD of 57.36%. The duties applied to most Chinese
producers, including those that HDI does business with. On
November 13, 2017 Commerce announced
final CVD and AD rates of 22.98% and 183.36% respectively.
The concluding phase of this trade case then passed to a
separate US government body, the International Trade Commission
("ITC"), to rule on whether final CVD and AD duties determined by
Commerce would be affirmed or rejected. On December 1, 2017, the ITC voted affirmatively
that the final CVD and AD rates determined by Commerce will be
implemented (the "Final Determination").
The trade case negatively affected HDI's gross margin in the
second half of 2017 as a result of (i) an increase in the cost of
certain import products as the Company increased purchasing from
brokers rather than mill direct sourcing, in order to minimize
potential exposure to retroactive CVD and AD duties; and (ii)
lower-than-expected product prices for hardwood plywood during this
period as significant supply of products imported prior to the
imposition of final duties remained available in the market.
Management estimates that as a result of the Trade Case, annual
adjusted EBITDA and fourth quarter Adjusted EBITDA were reduced by
$2.2 million and $1.2 million respectively, while annual Adjusted
profit and fourth quarter Adjusted profit were reduced by
$1.3 million and $0.7 million respectively.
"Going forward, we believe the final combined duty rate of over
206% will make Chinese hardwood plywood non-competitive in the US
market," commented Mr. Brown. "Approximately 11% of our total
sales prior to the trade case were affected, and we have spent the
last year planning for this potential outcome. Through 2017,
we were successful in securing the appropriate supply of products
our customers needed and we retained our market share throughout
the trade case process. At the same time, we have been
working with our domestic and overseas vendor partners to develop
reliable, alternative product solutions to continue to supply our
customers going forward. The trade case disruption is expected to
result in some downward pressure on our gross margin percentage
through to mid-2018. Potentially countering this impact however is
our expectation that sales will benefit from rising hardwood
plywood prices in North America as
we pass on price increases to the customer. By the second half of
2018, we expect the existing surplus of imported product in the
North American market will have worked its way through the supply
chain, and pricing and margins on hardwood plywood should begin to
more accurately reflect the new supply dynamics."
Outlook
On December 21, 2017, the United States enacted H.R.1 (the
"Legislation"), also known as the Tax Cuts and Jobs Act. The
Legislation includes substantial changes to the US taxation for
individuals, corporations, and unincorporated businesses in all
industries. For HDI, the significant features and impacts of this
Legislation include the change in corporate tax rate from 35% to
21%, the immediate expensing of certain qualified capital
investments, and limitations on the deductibility of certain
interest expense. The change in the corporate tax rate going
forward resulted in a one-time charge to deferred tax expense of
$1.0 million in the fourth
quarter.
While there is still some uncertainty about how various states
will implement the interest deductibility provisions, as a whole,
management views the new rules as a positive development. Had the
new lower tax rate been in effect in 2017, the Company's pro forma
Adjusted EPS would have been $1.58,
or 8.9% higher than reported for the year. This represents a
decrease in income tax expense of $2.6
million.
In contrast, impacts resulting from the duties imposed on
Chinese hardwood plywood entering the US are expected to result in
some downward pressure on our gross margin percentage through to
mid-2018. Potentially countering this impact however is our
expectation that sales will benefit from rising hardwood plywood
prices in North America as we pass
on price increases to the customer. See Trade Case section for
further details.
In terms of market outlook, the unevenness and relatively slow
growth experienced in the US residential construction market in
2017 is expected to continue in 2018. Market fundamentals
remain sound however, with US job growth and income levels gaining
momentum. Harvard's Joint Center for
Housing Studies 2017 report on "state of the nation's housing"
concluded that single-family housing construction, traditionally
the largest source of residential investment, remains well below
historical levels. With average housing starts at 1.3 million in
2017, there is room for growth in this market as the long-term
historical average is closer to 1.5 million annual starts. HDI
expects it will take some years to reach the 1.5 million level, and
as a result, expects low-to-mid single digit organic market growth
for its end-markets and products. In the non-residential
construction market, the American Institute of Architects predicts
growth of 4.0% in 2018, with the strongest gains anticipated for
the commercial sectors that HDI focuses on. The Company will
seek to outperform organic market growth through our strategic
initiatives.
"Our performance enabled us to distribute $5.6 million in dividends to investors, which
combined with share price appreciation, contributed to a total
return of 14.6% to holders of HDI shares in 2017," said Mr.
Brown. "I am excited by our prospects and deeply proud of the
growth and evolution of the Company thus far. We are not just
getting bigger, we are focused on quality, integrity and
professionalism as we create long-term value for all of our
stakeholders."
Summary of Results
|
Selected Unaudited
Consolidated Financial Information (in thousands of Canadian
dollars)
|
|
|
Year
|
Year
|
Three
months
|
Three
months
|
|
ended December
31
|
ended December
31
|
ended December
31
|
ended December
31
|
|
2017
|
2016
|
2017
|
|
2016
|
Total
sales
|
$
|
1,037,041
|
$
|
789,321
|
$
|
247,433
|
$
|
239,449
|
|
Sales in the US
(US$)
|
693,826
|
498,198
|
169,615
|
155,661
|
|
Sales in
Canada
|
136,038
|
129,935
|
31,784
|
31,676
|
Gross
profit
|
191,875
|
143,778
|
44,503
|
43,523
|
|
Gross profit
%
|
18.5%
|
18.2%
|
18.0%
|
18.2%
|
Operating
expenses
|
(142,790)
|
(104,871)
|
(35,112)
|
(34,785)
|
Profit from operating
activities
|
49,085
|
38,907
|
9,391
|
8,738
|
Add: Depreciation and
amortization
|
6,504
|
4,806
|
1,608
|
2,125
|
Earnings before
interest, taxes, depreciation and
|
|
|
|
|
amortization
("EBITDA")
|
$
|
55,589
|
$
|
43,713
|
$
|
10,999
|
$
|
10,863
|
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
(6,504)
|
(4,806)
|
(1,608)
|
(2,125)
|
|
|
Net finance income
(expense)
|
(2,502)
|
(1,465)
|
(677)
|
(668)
|
|
|
Income tax
expense
|
(16,629)
|
(13,580)
|
(3,770)
|
(1,493)
|
Profit for the
period
|
$
|
29,954
|
$
|
23,862
|
$
|
4,944
|
$
|
6,577
|
Basic profit per
share
|
$
|
1.40
|
$
|
1.27
|
$
|
0.23
|
$
|
0.30
|
Diluted profit per
share
|
$
|
1.39
|
$
|
1.25
|
$
|
0.23
|
$
|
0.29
|
Average Canadian
dollar exchange rate for one US dollar
|
1.30
|
1.32
|
1.27
|
1.33
|
|
Analysis of
Specific Items Affecting Comparability (in thousands of Canadian
dollars)
|
|
|
|
|
Year
|
Year
|
Three
months
|
Three
months
|
|
ended December
31
|
ended December
31
|
ended December
31
|
ended December
31
|
|
2017
|
2016
|
2017
|
2016
|
Earnings before
interest, taxes, depreciation and
|
|
|
|
amortization
("EBITDA"), per table
above
|
$
|
55,589
|
$
|
43,713
|
$
|
10,999
|
$
|
10,863
|
Transaction
expenses
|
273
|
2,436
|
—
|
50
|
Mark-to-market
adjustment on cash settled LTIPs
|
450
|
—
|
(335)
|
—
|
Adjusted
EBITDA
|
$
|
56,312
|
$
|
46,149
|
$
|
10,664
|
$
|
10,913
|
Adjusted EBITDA as
a % of revenue
|
5.4%
|
5.8%
|
4.3%
|
4.6%
|
|
|
|
|
Profit for the
period, as reported
|
$
|
29,954
|
$
|
23,862
|
$
|
4,944
|
$
|
6,577
|
Revaluation of
deferred tax assets due to US tax reform
|
989
|
—
|
989
|
—
|
Adjustments, net of
tax
|
275
|
1,516
|
(228)
|
31
|
Adjusted profit for
the period
|
$
|
31,218
|
$
|
25,378
|
$
|
5,705
|
$
|
6,608
|
|
|
|
|
Basic profit per
share, as reported
|
$
|
1.40
|
$
|
1.27
|
$
|
0.23
|
$
|
0.30
|
Net impact of above
items per share
|
0.06
|
0.08
|
0.04
|
—
|
Adjusted basic profit
per share
|
$
|
1.46
|
$
|
1.35
|
$
|
0.27
|
$
|
0.30
|
|
|
|
|
Diluted profit per
share, as reported
|
$
|
1.39
|
$
|
1.25
|
$
|
0.23
|
$
|
0.29
|
Net impact of above
items per share
|
0.06
|
0.08
|
0.04
|
—
|
Adjusted diluted
profit per share
|
$
|
1.45
|
$
|
1.33
|
$
|
0.27
|
$
|
0.29
|
Results from Operations - Year Ended December 31,
2017
For the year ended December 31,
2017, total sales increased by 31.4% to $1,037.0 million, from $789.3 million in 2016. Of the $247.7 million year-over-year increase,
$224.1 million, representing a 28.4%
increase in sales, was due to acquired businesses and $37.1 million, representing a 4.7% increase in
sales, was due to organic growth. Sales results also reflect a
$13.5 million negative foreign
exchange impact, resulting from a stronger Canadian dollar when
translating US sales to Canadian dollars for reporting
purposes.
HDI's US operations increased sales by US$195.6 million, or 39.3%, to US $693.8 million. Acquired businesses contributed
sales of US$172.6 million and organic
growth accounted for US$23.1 million,
representing a 4.6% increase in sales. Sales in Canada increased by $6.1 million, or 4.7%, year-over-year. The
increase in Canadian sales was entirely organic and reflects HDI's
success in winning new business.
Gross profit for the 2017 year increased 33.5% to $191.9 million, from $143.8 million in 2016. This improvement reflects
the combination of increased sales and a higher gross profit
margin. As a percentage of sales, gross profit margin increased to
18.5% from 18.2% year-over-year, primarily reflecting Rugby's
higher margin business model, partially offset by the negative
impacts of the Trade Case on gross margin.
Operating expenses for the year ended December 31, 2017, were $142.8 million, compared to $104.9 million in 2016. The $37.9 million increase primarily reflects
expenses of $37.1 million from
acquired businesses, amortization of $1.1
million related to customer relationships acquired in
connection with the Rugby acquisition, $3.1
million of added costs to support organic growth, and an
increase of $0.5 million related to
mark-to-market adjustments on LTIPs. These increases were partially
offset by a $2.2 million reduction in
transaction-related expenses and a $1.7
million reduction in expenses due to the impact of a
stronger Canadian dollar on translation of US operating
expenses.
For the year ended December 31, 2017, Adjusted EBITDA grew
22.0% to $56.3 million, from
$46.1 million in 2016. The
$10.2 million increase primarily
reflects the $48.1 million increase
in gross profit, partially offset by a $37.9
million increase in operating expenses (before a decrease in
transaction expenses, an increase in mark-to-market adjustments
relating to LTIPs, and an increase in depreciation and
amortization).
Results from Operations - Three Months Ended
December 31, 2017
For the three months ended December 31, 2017, total sales
increased 3.3% to $247.4 million,
from $239.4 million in 2016. Of the
$8.0 million year-over-year increase,
$7.7 million, representing a 3.2%
increase in sales, was due to acquired businesses and $10.6 million, representing a 4.4% increase in
sales, was due to organic growth. These sales gains were partially
offset by a $10.3 million negative
foreign exchange impact resulting from a stronger Canadian dollar
when translating US sales to Canadian dollars for reporting
purposes.
HDI's US operations, which accounted for approximately 87% of
fourth quarter revenues, increased sales by US$14.0 million, or 9.0%, to US$169.6 million. Acquired businesses
contributed sales of US$6.1 million
and US operations achieved organic growth of US$7.9 million, representing a 5.1% increase in
sales. Sales in Canada,
which comprised approximately 13% of fourth quarter revenues, were
relatively flat at $31.8 million,
compared to $31.7 million in the same
period last year.
Fourth quarter gross profit increased to $44.5 million, an increase of 2.3% from
$43.5 million in Q4 2016. The
year-over-year improvement reflects higher sales revenue, partially
offset by the negative impacts of the Trade Case on gross
margin. As a percentage of sales, fourth quarter gross profit
margin was 18.0% compared to 18.2% in Q4 2016.
Operating expenses for the three months ended December 31, 2017 were $35.1 million, compared to $34.8 million in Q4 2016. The $0.3 million increase reflects operating expenses
of $1.7 million from acquired
businesses and $0.9 million of added
costs to support organic growth. These increases were partially
offset by a $0.3 million reduction in
expenses related to the mark-to-market adjustment on LTIPs, a
$1.4 million decrease due to the
impact of a stronger Canadian dollar on translation of US operating
expenses, a $0.1 million
year-over-year decrease in acquisition-related expenses, and a
decrease in amortization of $0.5
million related to customer relationships acquired in
connection with the Rugby acquisition.
Fourth quarter Adjusted EBITDA was $10.7
million, a decrease of $0.2
million from Adjusted EBITDA of $10.9
million in Q4 2016. The change in Adjusted EBITDA reflects
the $1.2 million increase in
operating expenses (before a decrease in transaction expenses,
mark-to-market adjustments relating to LTIPs, and depreciation and
amortization), largely offset by the $1.0
million increase in gross profit.
Fourth quarter Adjusted EBITDA was reduced by an estimated
$1.2 million as it relates to the
Trade Case. As a percentage of revenue, Adjusted EBITDA margin was
4.3% in the fourth quarter of 2017, compared to 4.6% in the same
quarter last year.
A more detailed discussion of the Company's financial
performance can be found in HDI's 2017 Management's Discussion and
Analysis (MD&A). 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) on or before
March 15, 2018.
About Hardwoods Distribution Inc.
HDI is North America's largest
wholesale distributor of architectural grade building products to
the residential and commercial construction sectors. The Company
operates a North American network of 62 distribution centres, as
well as one 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, this press release
references certain EBITDA Ratios, such as EBITDA margin (being
EBITDA as a percentage of revenues). In addition to profit,
HDI considers EBITDA and EBITDA Ratios to be useful supplemental
measures of the Company's ability to meet debt service and capital
expenditure requirements, and interprets 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, mark-to-market
adjustments, and revaluation of deferred tax assets. 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, mark-to-market
adjustments, and revaluation of deferred tax assets. The
aforementioned adjusted measures are collectively referenced as
"the Adjusted Measures". HDI considers 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. HDI's method of
calculating the Non-GAAP Measures may differ from the methods used
by other issuers. Therefore, 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: Going
forward, we believe the final combined duty rate of over 206% will
make Chinese hardwood plywood non-competitive in the US market; we
have been working with our domestic and overseas vendor partners to
develop reliable, alternative product solutions to continue to
supply our customers going forward; the trade case disruption is
expected to result in some downward pressure on our gross margin
percentage through to mid-2018; potentially countering this impact
however is our expectation that sales will benefit from rising
hardwood plywood prices in North
America as we pass on price increases to the customer; by
the second half of 2018, we expect the existing surplus of imported
product in the North American market will have worked its way
through the supply chain, and pricing and margins on hardwood
plywood should begin to more accurately reflect the new supply
dynamics; there is still some uncertainty about how various states
will implement the interest deductibility provisions; in terms of
market outlook, the unevenness and relatively slow growth
experienced in the US residential construction market in 2017 is
expected to continue in 2018; with average housing starts at 1.3
million in 2017, there is room for growth in this market as the
long-term historical average is closer to 1.5 million annual
starts; HDI expects it will take some years to reach the 1.5
million level, and as a result, expects low-to-mid single digit
organic market growth for its end-markets and products; In the
non-residential construction market, the American Institute of
Architects predicts growth of 4.0% in 2018, with the strongest
gains anticipated for the commercial sectors that HDI focuses on;
and the Company will seek to outperform organic market growth
through our strategic initiatives.
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.