HDI Announces First Quarter 2018 Results

Declares Quarterly Dividend of $0.0725 per share

TRADING SYMBOL: Toronto Stock Exchange - HDI

LANGLEY, BC, May 10, 2018 /CNW/ - Hardwoods Distribution Inc. ("HDI" or the "Company") today announced financial results for the three months ended March 31, 2018.  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 months ended March 31, 2018)

• Consolidated sales increased 4.4% to $270.8 million. After taking into account the difference in foreign exchange rate used to translate our US operations for reporting purposes, consolidated sales increased 8.5%.
• Sales from US operations increased 9.6% as compared to the same period in 2017. Organic growth accounted for 5.6% of the increase in sales. Acquisitions-based growth contributed 3.9%.
• Sales from Canadian operations increased 2.6% year-over-year, despite one fewer selling day as compared to the same period in 2017. On a sales-per-day basis, Canadian sales increased by 4.4%.
• Gross profit increased slightly to $48.7 million; gross profit margin was 18.0%.
• Operating expenses improved slightly to 13.8% of sales, as compared to 13.9% in Q1 2017.
• Adjusted EBITDA was $13.2 million, compared to $14.0 million in Q1 2017, reflecting the impacts of the US trade case against hardwood plywood imported from China (See US Trade Case section).
• First quarter Adjusted profit increased 5.0% to $8.3 million year-over-year, reflecting the positive impact of a lower US corporate tax rate. Diluted profit per share grew by $0.02 or 5.4%, to $0.39 per share.
• Adjusted EBITDA and Adjusted profit were reduced this quarter by $0.6 million and $0.4 million respectively related to the difference in foreign exchange rate used to translate our US operations for reporting purposes.
• The Board of Directors approved a quarterly dividend of $0.0725 per share, payable on July 27, 2018 to shareholders of record as at July 16, 2018.

"We achieved solid revenue growth in the first quarter with a combination of organic and acquisition-based growth more than offsetting the negative impacts of a stronger Canadian dollar," said Rob Brown, President and CEO of Hardwoods.  "Our business is benefiting from a healthy level of demand in our key markets, improving prices for some products, and the continued successful implementation of our business strategies."

"While the US trade case put downward pressure on our gross profit margin in the first quarter, the reduction in the US corporate tax rate offset the bottom-line impact and our profit improved. We continue to anticipate that the trade case impacts will lessen around mid-year as market supply and pricing become better balanced."

"Going forward, we remain well positioned to pursue our growth objectives with a clearly defined strategy, generally positive economic conditions, and a leading market position," added Mr. Brown.

US Trade Case

On December 1, 2017, the ITC voted affirmatively that the final CVD and AD rates determined by Commerce will be implemented (the "Final Determination"). See the Company's annual report as filed on sedar.com for a summary of the trade case proceedings.

The trade case reduced HDI's first quarter 2018 gross margin by an estimated $1.2 million and profit by an estimated $0.9 million, primarily as a result of (i) an increase in the Company's cost for certain product lines as it purchased from brokers or domestic sources, rather than sourcing directly from mills in China; and (ii) a comparatively slower ramp up in the Company's ability to pass along cost increases to customers, reflecting a large supply of products in the market, most of which was imported prior to the imposition of  final duties.

Management believes the final combined duty rate of 206.34% will make Chinese hardwood plywood non-competitive in the US market, and has spent the last year planning for this potential outcome.  Through 2017 and the first quarter of 2018,  HDI has been successful in securing an appropriate supply of products for its customers and has suffered no significant loss of market share as a result.  The Company is also making good progress as it works with domestic and overseas vendor partners to develop reliable, alternative product solutions for customers going forward. While the trade case disruption is expected to continue to result in some downward pressure on  gross margin percentage through to mid-2018, hardwood plywood prices are gradually strengthening, and HDI expects its ability to pass along cost increases to customers will improve as market supply tightens.

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.  While there is still some uncertainty about how various states will implement the interest deductibility provisions, as a whole, HDI views the new rules as a positive development. The lower tax rate had a positive impact on first quarter profitability, increasing Adjusted EPS by $0.04 or 10.8%. This represents a decrease in income tax expense of  $0.8 million for the period.

As noted in the US Trade Case section, HDI expects gross margin percentage will continue to experience some downward pressure through mid-2018 as a result of the new duties imposed on Chinese hardwood plywood entering the US.  Potentially countering this impact, however, is the expectation that sales will benefit from rising hardwood plywood prices in North America. By the second half of 2018, the existing surplus of imported product in the North American market is expected to 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. HDI continues to work with domestic manufacturers and vendor partners overseas to develop reliable, alternative product solutions going forward.

In terms of market outlook, HDI expects low-to-mid single digit organic market growth for its end-markets and products. Strategically, the Company will seek to outperform organic market growth through its strategic initiatives, which include building market share with a focus on core wood products and the decorative surfaces and composites product categories; supporting HDI's brands in the marketplace by creating a sustainable competitive advantage with size and scale, and pursuing accretive acquisitions.

The Board will continue to review HDI's financial performance and assess dividend levels on a regular basis. Management will maintain its focus on keeping the balance sheet strong, reducing debt and supporting future strategic acquisitions.

Q1 2018 Investor Call

The Company will hold an investor call on Friday, May 11, 2018 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-888-231-8191 or (647) 427-7450 (GTA) at least five minutes before the call to register. A replay will be available until May 25, 2018 by calling toll free 1-855-859-2056 or (416) 849-0833 (GTA), followed by passcode 6854489.

Summary of Results

Results from Operations - Three Months Ended March 31, 2018

For the three months ended March 31, 2018, total sales increased 4.4% to $270.8 million, from $259.3 million during the same period in 2017. Included in the $11.5 million year-over-year increase is $13.6 million, representing a 5.2% increase in sales, related to organic growth and $8.5 million, representing a 3.3% increase in sales, related to the addition of Acquired Businesses. These gains were partially offset by a $10.6 million negative foreign exchange impact resulting from a stronger Canadian dollar when translating US sales to Canadian dollars for reporting purposes.

Sales from US operations increased by US$16.3 million, or 9.6%, to US$185.9 million, from US$169.6 million in the same period in 2017.  Organic growth accounted for US$9.6 million of this increase, representing a 5.6% increase in sales. Acquired businesses contributed sales of US$6.7 million.

Sales in Canada increased by $0.9 million, or 2.6%, year-over-year, despite one fewer selling day in the first quarter of 2018 as compared to the same quarter in 2017.  On a sales-per-day basis, sales in Canada increased by 4.4% year-over-year. 

Gross profit for the three months ended March 31, 2018 increased 0.9% to $48.7 million, from $48.3 million during the same period in 2017. The $0.4 million improvement reflects higher sales, partially offset by a lower gross profit margin.

Operating expenses increased to $37.4 million in the first quarter of 2018, from $36.0 million during the same period in 2017. The $1.4 million increase includes $1.6 million of operating expenses from the Acquired Businesses, $1.0 million of added costs to support organic growth, and $0.2 million related to the mark-to-market adjustment on LTIPs.  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.

For the three months ended March 31, 2018, HDI reported Adjusted EBITDA of $13.2 million, as compared to $14.0 million during the same period in 2017.  The $0.8 million reduction reflects the $1.2 million increase in operating expenses (before an increase in mark-to-market adjustments relating to LTIPs, and an increase in depreciation and amortization), partially offset by the $0.4 million increase in gross profit. The Trade Case had an estimated $1.2 million negative impact on first quarter Adjusted EBITDA.

Income tax expense decreased to $2.5 million in the first quarter of 2018, from $3.8 million in the same period in 2017.  The decrease was primarily driven by a lower effective tax rate in the US and lower taxable income in the Q1 2018 period as compared to the same quarter in the previous year.

Profit for the three months ended March 31, 2018 increased 3.1% to $8.2 million, from $7.9 million in the same period in 2017.

A more detailed discussion of the Company's financial performance can be found in HDI's Q1 2018 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 May 10, 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:  We continue to anticipate that the trade case impacts will lessen around mid-year as market supply and pricing become better balanced; management believes the final combined duty rate of 206.34% will make Chinese hardwood plywood non-competitive in the US market; while the trade case disruption is expected to continue to result in some downward pressure on  gross margin percentage through to mid-2018, hardwood plywood prices are gradually strengthening, and HDI expects its ability to pass along cost increases to customers will improve as market supply tightens; HDI expects gross margin percentage will continue to experience some downward pressure through mid-2018 as a result of the new duties imposed on Chinese hardwood plywood entering the US, potentially countering this impact, however, is the expectation that sales will benefit from rising hardwood plywood prices in North America; by the second half of 2018, the existing surplus of imported product in the North American market should 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; HDI continues to work with domestic manufacturers and vendor partners overseas to develop reliable, alternative product solutions going forward; in terms of market outlook, HDI expects low-to-mid single digit organic market growth for our end-markets and products.

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.