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HDI Announces Second Quarter 2018 Results

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HDI Announces Second Quarter 2018 Results

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Per share diluted profit and adjusted diluted profit increase 2.2% and 8.9% respectively
Increases Quarterly Dividend by 10% to $0.08 per Share

TRADING SYMBOL: Toronto Stock Exchange - HDI

LANGLEY, BC, Aug. 8, 2018 /CNW/ - Hardwoods Distribution Inc. ("HDI" or the "Company") today announced financial results for the three and six months ended June 30, 2018.  HDI is North America's largest wholesale distributor of architectural grade building products to the residential and commercial construction markets, with a comprehensive US and Canadian distribution network.

Highlights (For the three months ended June 30, 2018)

  • Consolidated sales increased 7.4% to $298.2 million year-on-year. After taking into account the difference in foreign exchange rate used to translate sales from US operations for reporting purposes, consolidated sales increased 8.0% as compared to Q2 2017.

  • Sales from US operations increased 12.4% year-over-year. Organic growth accounted for 8.6% of this increase, with acquisitions-based growth contributing 3.8%.

  • Sales from Canadian operations increased 4.1% year-over-year and included one additional selling day as compared to Q2 2017. On a sales-per-day basis, Canadian sales increased by 2.4%.

  • Gross profit increased $1.5 million to $53.0 million; gross profit margin was 17.8%. Operating expenses as a percentage of sales were consistent with the same period in 2017 at 13.0%.

  • Second quarter profit increased 2.0%, and Adjusted profit increased 8.8% year-over-year, reflecting the positive impact of a lower US corporate tax rate (see regulatory update section).

  • Adjusted EBITDA was $16.8 million, as compared to $17.2 million in Q2 2017, reflecting the impact of the US trade case against hardwood plywood imported from China  (see regulatory update section) together with a negative foreign exchange impact.

  • Second quarter Adjusted EBITDA and profit were reduced by $0.6 million and $0.4 million respectively as a result of the year-over-year change in foreign exchange rate used to translate US operations results for reporting purposes (the "Foreign Exchange Translation Impact").

  • The Board of Directors approved an increase to the dividend of 10%, bringing the quarterly dividend rate to $0.08 per share.  The dividend will be paid on October 26, 2018 to shareholders of record as at October 15, 2018.

"We generated top and bottom line growth again this quarter as we increased volumes in response to growing demand, achieved improved prices for some of our products, and benefited from acquisitions and the successful implementation of our business strategy," said Rob Brown, President and CEO of Hardwoods. "This was our second consecutive quarter of revenue and profit improvement. These strong results were achieved despite a stronger Canadian dollar and lingering downward pressure on our gross profit margin related to the US trade case. The combination of a reduced US corporate tax rate with our solid operating performance offset the negative bottom-line impacts and our profit improved."

"Our outlook going forward remains positive as we respond to favorable market conditions. As North America's largest distributor of architectural grade building products, we are well positioned to take advantage of the healthy demand levels, while continuing to pursue our growth strategies," said Mr. Brown.

"I am very pleased to report that our performance and positive outlook resulted in the Board's decision to increase our dividend by 10% to $0.08 per share, bringing our annual dividend to $0.32 per share. This represents our seventh dividend increase in the past seven years," added Mr. Brown.

Regulatory Update

Taxation

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 lower tax rate had a positive impact on second quarter profitability, increasing profit per share by $0.05 or 10.2%. This represents a decrease in income tax expense of $1.0 million for the period.

Trade Disruption

Recent Trade Actions: The US government has continued to undertake significant trade actions in addition to those implemented against Chinese hardwood plywood in late 2017 (the Trade Case Impact discussed below). While  the trade landscape is changing rapidly and has resulted in the implementation of retaliatory tariffs by US trading partners, none of the subsequent actions have had an impact on our product lines. We are closely monitoring trade actions and will respond should any impact our business.

Trade Case Impact: On December 1, 2017, the ITC voted affirmatively that the final countervailing and anti-dumping duty rates relating to hardwood plywood imported from China into the US be implemented. For a more detailed summary of the trade case proceedings, please see HDI's annual report and first quarter MD&A filed on sedar.com. The trade case continued to negatively affect gross margin percentage in the second quarter of 2018, primarily as a result of increased costs for certain product lines that now must be purchased from brokers or alternate sources, rather than sourced directly from mills in China. The Company's price pass through model has enabled it to gradually increase selling prices for affected products, and resulted in gross profit dollars increasing in the second quarter as compared to the same period in the prior year.

Outlook

HDI anticipates a continuation of mid-to-high single digit organic market growth in US end-markets through the balance of 2018, while in Canada, the expectation is for low-to-mid single digit organic growth. Gross profit dollars, EBITDA, and profit are all expected to increase compared to the third and fourth quarters of 2017 as the Company responds to growth in demand and continues to align product prices with costs. Gross profit percentage is expected to be at the low end of the 18-19% target range for the balance of the year.

"We are moving forward with a strong balance sheet, which positions us to pursue our business strategies and seek out attractive acquisitions as we work to further enhance our market position and  respond to significant market growth opportunities in the US," said Mr. Brown.  "We remain committed to the disciplined and strategic business approach that has translated into a long track record of improving operating performance, and which in turn, has enabled us to reward investors with dividend increases like the one announced today."

Q2 2018 Investor Call

The Company will host a conference call on Thursday August 9, 2018 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-888-390-0546 or (416) 764-8688 (GTA) at least five minutes before the call begins. A replay will be available through August 23, 2018 by calling toll free 1-888-390-0541 or (416) 764-8677 (GTA), followed by passcode 237051.

Summary of Results


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







Three months

ended June 30
2018

Three months

ended June 30
2017

Six months
ended June 30
2018

Six months

ended June 30
2017

Total sales

$

298,172

277,545

$

568,927

$

536,821


Sales in the US (US$)

202,397

180,048

388,282

349,654


Sales in Canada

36,997

35,527

72,663

70,279

Gross profit

53,000

51,544

101,700

99,820


Gross profit %

17.8%

18.6%

17.9%

18.6%

Operating expenses

(38,813)

(36,037)

(76,163)

(71,978)

Profit from operating activities

14,187

15,507

25,537

27,842

Add: Depreciation and amortization

1,690

1,709

3,314

3,392

Earnings before interest, taxes, depreciation and






amortization ("EBITDA")

$

15,877

17,216

$

28,851

$

31,234


EBITDA as a % of revenue

5.3%

6.2%

5.1%

5.8%


Add (deduct):







Depreciation and amortization

(1,690)

(1,709)

(3,314)

(3,392)



Net finance income (expense)                        

(833)

(641)

(1,466)

(1,195)



Income tax expense

(3,395)

(5,104)

(5,932)

(8,949)

Profit for the period

$

9,959

$

9,762

$

18,139

$

17,698

Basic profit per share

$

$

0.46

$

0.85

$

0.83

Diluted profit per share

$

0.46

$

0.45

$

0.84

$

0.82

Average Canadian dollar exchange rate for one US dollar

$

1.29

$

1.34

$

1.28

$

1.33

 


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







Three months

ended June 30

2018

Three months

ended June 30

2017

Six months

ended June 30

2018

Six months

ended June 30

2017

Earnings before interest, taxes, depreciation and






amortization ("EBITDA"), per table above

$

15,876

$

17,216

$

28,851

$

31,234

Allowance related to duty deposits receivable

880

880

Mark-to-market adjustments on cash settled LTIPs

$

$

$

178

$

Adjusted EBITDA

$

16,756

$

17,216

$

29,909

$

31,234

Adjusted EBITDA as a % of revenue

5.6%

6.2%

5.3%

5.8%






Profit for the period, as reported

$

9,959

$

9,762

$

18,139

$

17,698

Adjustments, net of tax

660

814

Adjusted profit for the period

$

10,619

$

9,762

$

18,953

$

17,698






Basic profit per share, as reported

$

0.46

$

0.46

$

0.85

$

0.83

Net impact of above items per share

0.03

0.04

Adjusted basic profit per share

$

0.49

$

0.46

$

0.89

$

0.83






Diluted profit per share, as reported

$

0.46

$

0.45

$

0.84

$

0.82

Net impact of above items per share

0.03

0.04

Adjusted diluted profit per share

$

0.49

$

0.45

$

0.88

$

0.82

 

Results from Operations - Three Months Ended June 30, 2018

For the three months ended June 30, 2018, total sales increased 7.4% to $298.2 million, from $277.5 million during the same period in 2017. Of the $20.7 million year-over-year increase, $22.2 million, representing a 8.0% increase in sales, was due to organic growth and $8.9 million, representing a 3.2% increase in sales, reflects the addition of acquired businesses. These gains were partially offset by a $10.5 million unfavorable foreign exchange translation impact resulting from a stronger Canadian dollar when translating US sales to Canadian dollars for reporting purposes.

Sales from HDI's US operations increased by US$22.3 million, or 12.4%, to US$202.4 million, from US$180.0 million in the same period in 2017.  The US operations achieved organic growth of  US$15.5 million, representing a 8.6% increase in sales, reflecting increased volumes as well as some price inflation on certain product lines. Growth from acquired businesses contributed an additional US$6.9 million of sales in the quarter.

Sales in Canada increased by $1.5 million, or 4.1%, year-over-year.  There was one more selling day in Canada compared to Q2 2017; on a sales-per-day basis the growth was 2.4%.

Gross profit for the three months ended June 30, 2018 increased 2.8% to $53.0 million, from $51.5 million during the same period in 2017.  This $1.5 million improvement reflects higher sales, partially offset by a lower gross profit margin.

For the three months ended June 30, 2018, operating expenses were $38.8 million compared to $36.0 million during the same period in 2017.  The $2.8 million increase includes $1.6 million of operating expenses related to acquired businesses, $1.6 million of added costs to support organic growth, and $0.9 million for an allowance related to duty deposits receivable. These impacts were partially offset by a $1.4 million decrease in expenses due to the impact of a stronger Canadian dollar on translation of US operating expenses. As a percentage of sales, operating expenses were consistent with Q2 2017 at 13.0%.

For the three months ended June 30, 2018, we reported Adjusted EBITDA of $16.8 million, as compared to $17.2 million during the same period in 2017. The $0.4 million reduction primarily reflects the increase in gross profit by $1.5 million offset by the $1.9 million increase in operating expenses (excluding $0.9 million for an allowance related to duty deposits receivable).

The Trade Case Impact had an estimated $1.2 million negative impact on second quarter EBITDA, while the Foreign Exchange Translation Impact reduced EBITDA by an estimated $0.6 million as compared to Q2 2017.

For the three months ended June 30, 2018, net finance expense was $0.8 million compared to $0.6 million in the same period in 2017. The year-over-year increase primarily relates to interest on bank indebtedness.

Income tax expense decreased to $3.4 million for the three months ended June 30, 2018, from $5.1 million during the same period in 2017.  The decrease was primarily driven by a lower effective tax rate in the US as compared to the same quarter in the previous year.

Profit for the three months ended June 30, 2018 increased 2.0% to $10.0 million, from $9.8 million during the same period in 2017. Adjusted profit for the three months ended June 30, 2018 increased 8.8% to $10.6 million, from $9.8 million during the same period in 2017. Second quarter Adjusted profit excludes the allowance related to duty deposits receivable.

We estimate that the Trade Case Impact and Foreign Exchange Translation Impact reduced second quarter profit and Adjusted Profit by $0.9 million and $0.4 million respectively after tax as compared to Q2 2017.

Results from Operations - Six Months Ended June 30, 2018

For the six months ended June 30, 2018, total sales increased 6.0% to $568.9 million, from $536.8 million during the same period in 2017. Of the $32.1 million year-over-year increase, $17.4 million, representing a 3.2% increase in sales, was due to acquired businesses and $35.8 million, representing a 6.7% increase in sales, was due to organic growth.  The growth in first half sales was achieved despite a $21.1 million unfavorable foreign exchange translation impact resulting from a stronger Canadian dollar when translating  US sales to Canadian dollars for reporting purposes.

Six-month sales from HDI's US operations increased by US$38.6 million, or 11.0%, to US$388.3 million. This was up from sales of US$349.7 million in the first half of  2017. Organic growth accounted for US$25.0 million of the gain, representing a 7.2% increase in sales, and reflects increased volumes as well as some price inflation on certain product lines. Growth from acquired businesses contributed additional sales of US$13.6 million.

First half sales in Canada increased by $2.4 million, or 3.4%, as compared to the same period in 2017.   The increase in Canadian sales was entirely organic and reflects success in winning new business.

Gross profit for the six months ended June 30, 2018 increased 1.9% to $101.7 million, from $99.8 million during the same period in 2017.  This $1.9 million improvement reflects higher sales, partially offset by a lower gross profit margin.

For the six months ended June 30, 2018, operating expenses increased to $76.2 million, from $72.0 million during the same period in 2017.  The $4.2 million increase includes the addition of  $3.3 million of operating expenses related to acquired businesses, $2.7 million of added costs to support organic growth, and $0.9 million for an allowance related to duty deposits receivable. These increases were partially offset by a $2.8 million decrease in expenses due to the impact of a stronger Canadian dollar compared to the first half of 2017, on translation of US operating expenses. As a percentage of sales, operating expenses were consistent with the first half of 2017 at 13.4%.

For the six months ended June 30, 2018, we reported Adjusted EBITDA of $29.9 million, as compared to $31.2 million during the same period in 2017. The $1.3 million reduction primarily reflects the increase in gross profit of $1.9 million offset by the $3.3 million increase in operating expenses (excluding $0.9 million for an allowance related to duty deposits receivable).

The Trade Case Impact reduced first half  EBITDA by an estimated $2.4 million, while the Foreign Exchange Translation Impact reduced EBITDA by an estimated $1.2 million as compared to the same period in the prior year.

For the six months ended June 30, 2018, net finance expense was $1.5 million compared to $1.2 million in the same period in 2017. This increase relates primarily to interest on bank indebtedness.

Income tax expense decreased to $5.9 million for the six months ended June 30, 2018, from $8.9 million during the same period in 2017.  The decrease was primarily driven by the lower effective tax rate in the US that came into effect in 2018.

Profit for the six months ended June 30, 2018 increased 2.5% to $18.1 million, from $17.7 million during the same period in 2017. Adjusted profit for the six months ended June 30, 2018 increased 7.1% to $19.0 million, from $17.7 million during the same period in 2017.

We estimate that the Trade Case Impact and Foreign Exchange Translation Impact reduced first half 2018 Profit by $1.8 million and $0.8 million respectively after tax as compared to the same period in the prior year.

About HDI

HDI is North America's largest distributor of architectural grade building products to the residential and industrial construction markets. 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 mark-to-market adjustments and allowance related to duty deposits receivable. "Adjusted EBITDA margin" is as defined above, before certain items related to mark-to-market adjustments and allowance related to duty deposits receivable. 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 mark-to-market adjustments and allowance related to duty deposits receivable. 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: HDI anticipates a continuation of mid-to-high single digit organic market growth in US end-markets through the balance of 2018, while in Canada, the expectation is for low-to-mid single digit organic growth; gross profit dollars, EBITDA, and profit are all expected to increase compared to the third and fourth quarters of; Gross profit percentage is expected to be at the low end of the 18-19% target range for the balance of the year.

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.

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