ADENTRA Announces Annual and Fourth Quarter 2023 Results

Adjusted EBITDA grows to US$44.5 million in the fourth quarter
US$238.1 million of cash flow from operations in 2023, including US$56.5 million in Q4

LANGLEY, BC, March 18, 2024 /CNW/ - ADENTRA Inc. ("ADENTRA" or the "Company") today announced financial results for the three and twelve months ended December 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 operate a network of 86 facilities in the United States and Canada. All amounts are shown in United States dollars ("US $" or "$"), unless otherwise noted.

Financial Highlights

• Generated full-year sales of $2.2 billion (C$3.0 billion), compared to $2.6 billion (C$3.4 billion) in 2022, a decrease of 13.2% attributable equally to a decrease in volumes and product prices; Q4 sales of $514.9 million (C$699.1 million), compared to $574.7 (C$780.4 million) in Q4 2022
• Gross margin percentage of 20.8% in 2023; Q4 gross margin percentage of 21.6%, representing our eleventh consecutive quarter with a gross margin percentage above 20.0%
• Operating expenses, after adjusting for accrued trade duties, decreased by $1.8 million to $358.3 million in 2023 despite significant inflationary pressures across the economy. Q4 operating expenses decreased by $5.5 million, or 6.0%, to $86.1 million
• Adjusted basic earnings per share were $2.43(C$3.28) in 2023, compared to $5.71(C$7.43) in 2022; Q4 adjusted basic earnings per share were $0.46(C$0.62), as compared to $0.66(C$0.90) per share in Q4 2022
• Full-year Adjusted EBITDA was $185.2 million (C$250.0 million), compared to $267.9 million (C$348.7 million) in 2022; Q4 Adjusted EBITDA increased to $44.5 million (C$60.4 million), up 2% from $43.6 million (C$59.2 million) in Q4 2022
• Generated strong cash flow from operating activities of $238.1 million in 2023, including $56.5 million in Q4 2023
• Effectively deployed capital in 2023, returning $17.8 million in cash to shareholders via dividends and share repurchases, and reducing debt by $223.6 million
• Announced an 8% increase to the quarterly dividend to C$0.14 per share, or C$0.56 annually, effective November 8, 2023

"We demonstrated the capabilities of our diversified business model in 2023, delivering strong results despite industry-wide volume declines and price deflation," said Rob Brown, ADENTRA's President and CEO. "While our results did not match the exceptional performance of 2022, our quarterly sales exhibited strong sequential resilience throughout the year and we maintained a gross margin percentage above 20% in every period."

"Our fourth quarter performance was notable. Sales volumes stabilized year-over-year, contributing to Q4 sales of $514.9 million. Our gross margin reached 21.6%, the highest of 2023, and marked our eleventh consecutive quarter with a gross margin above 20%. This, together with a $5.5 million reduction in operating expenses, helped us grow fourth quarter Adjusted EBITDA to $44.5 million, up 2% year-over-year, while our Q4 Adjusted EBITDA margin increased to 8.6%, from 7.6%."

"Our results for the full year affirm ADENTRA's business strategy, particularly our success in building a stable, predictable business model that performs well throughout all business cycles. We demonstrated our business model's ability to convert a high percentage of Adjusted EBITDA into operating cash flow before changes in working capital, and to release working capital and generate cash flow in periods of reduced economic activity. We generated full-year operating cash flow of $238.1 million, enabling us to reduce bank debt by $223.6 million, while lowering our Leverage Ratio to 2.7x. Additionally, we continued to provide returns for shareholders with the repurchase of 2% of our issued and outstanding shares in 2023 and an 8% increase in our quarterly dividend."

"Looking forward we see signs that the macroeconomic environment is beginning to stabilize and, combined with our continued gross margin strength and disciplined management of operating expenses, will help to support our 2024 performance. Longer term, the fundamentals underpinning the North American building products market remain highly favorable, and combined with our own strategies for capturing share in our large addressable market, provide a multi-year runway for growth," said Mr. Brown.

Outlook

Moving into 2024, the inflation and interest rate hikes of recent years are expected to continue to moderately impact economic activity. While our sales volumes have stabilized in recent quarters, we continue to experience softness in product pricing. Forecasters are anticipating a stable environment for residential construction in 2024 and a stable-to-lower year of demand for the repair and remodel market. Each of these markets represents approximately 40% of our business respectively.

We expect first quarter 2024 sales to be lower than in the same period in 2023, with higher volumes being offset by weaker product prices year-over-year. Sales comparisons to 2023 are expected to improve in the latter half of the year. In this environment, we anticipate modest growth in 2024 Adjusted EBITDA, driven by continued gross margin strength and disciplined management of operating expenses.

As we have demonstrated in previous business cycles and most recently in 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 is expected to continue converting 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 our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock. Forecasters are also anticipating potential interest rate cuts in the latter half of 2024, which could further support end-market demand for our products. We continue to see a multi-year runway for growth in the repair and remodel, residential, and commercial markets we participate in.

Introducing Revised Targets

At our analyst day in December 2022 we unveiled our strategic priorities and plans to continuing creating shareholder value. These priorities included our Destination 2026 goal of $3.5 billion in run-rate sales by 2026.

In 2023, the impact of the challenging macroeconomic environment, including industry-wide volume retraction and product price deflation, was stronger than we anticipated in our Destination 2026 plan. As noted in our outlook above, we also do not expect the market to grow meaningfully in 2024. As a result of these factors we have modified our plan with the revised goal of achieving $3.5 billion in run-rate sales by 2028, or the "Destination 2028" goal.

The other key metrics underpinning our $3.5 billion sales goal have not changed significantly from what was presented in the original plan. For further information, please refer to our investor presentation, which is posted on our company website.

Q4 and Year-end 2023 Investor Call

ADENTRA will hold an investor call on Monday March 18, 2024 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-888-664-6392 or (416) 764-8659 (GTA) at least five minutes before the call begins. A replay will be available through April 1, 2024 by calling toll free 1-888-390-0541 or (416) 764-8677 (GTA), followed by passcode 492580.

Summary of Results

Results from Operations - Year Ended December 31, 2023

For the year ended December 31, 2023, we generated total sales of $2.24 billion, as compared to the record-setting $2.58 billion we achieved in 2022 during a period of unusually high demand and product price inflation. The $340.2 million, or 13.2%, decrease primarily reflects a $362.6 million reduction in organic sales, partially offset by $28.6 million of incremental revenue from our acquisitions of Mid-Am and Rojo. The decrease in organic sales resulted from roughly equal parts lower volumes and product price deflation. The remaining $6.3 million of sales impact reflects an unfavorable foreign exchange impact related to the translation of Canadian sales to US dollars for reporting purposes.

Full-year sales from our US operations totaled $2.07 billion, as compared to $2.38 billion in 2022. The $311.0 million, or 13.1%, decrease reflects a $339.6 million year-over-year reduction in organic sales following the record-setting pace of 2022. The change in organic sales resulted from roughly equal parts lower volumes and product price deflation, partially offset by $26.4 million in additional revenue from a full year of Mid-Am's results, compared to just under 11 months of contribution in the same period last year. Full-year US sales also include $2.3 million of contribution from the Rojo business acquired in the first quarter.

In Canada, full-year sales totaled C$229.0 million, as compared to C$258.8 million in 2022. This C$29.8 million, or 11.5%, decrease primarily reflects equal parts lower volumes and product price deflation.

Gross profit for the year ended December 31, 2023 was $466.1 million, as compared to $556.7 million in 2022. The $90.6 million, or 16.3%, year-over-year decrease reflects lower organic sales and a gross profit percentage of 20.8%, as compared to 21.6% in 2022. Our 2022 gross profit percentage was elevated during the first half of the year by favorable market dynamics, including strong demand and tight supply.

For the year ended December 31, 2023, operating expenses increased by $13.7 million to $373.8 million (16.7% of sales), from $360.1 million (14.0% of sales) in the same period last year. The $13.7 million increase reflects accrued trade duties of $15.6 million, partially offset by savings related to increased operating efficiency.

Excluding the accrued trade duties, operating expenses decreased by $1.8 million year-over-year to $358.3 million, and operating expense as a percentage of sales was 16.0%, as compared to 14.0% in 2022. The reduction in operating expenses was primarily driven by a $6.5 million decrease in organic expenses, partially offset by $3.7 million in additional operating expenses from the inclusion of a full year's results from the Mid-Am operations and $1.0 million of amortization on intangible assets acquired in connection with the Mid-Am acquisition.

For the year ended December 31, 2023, depreciation and amortization increased to $69.9 million, from $65.5 million in 2022, reflecting a $4.4 million increase. This includes $1.5 million of incremental depreciation and amortization related to the Mid-Am acquisition, with the remaining $2.9 million attributed to higher depreciation on premise leases in our operations. Of the total $69.9 million, $22.1 million represents amortization on acquired intangible assets, compared to $21.3 million in the prior year.

For the year ended December 31, 2023, net finance expense increased to $49.4 million, from $33.9 million in 2022. Of this total, $37.0 million represented interest on bank borrowing, up from $26.8 million in the prior year, reflecting higher interest rates on bank indebtedness in the current period. We entered into an interest rate swap to mitigate some of our exposure to interest rate variability.

For the year ended December 31, 2023, income tax expense decreased to $6.9 million, from $34.1 million in 2022, primarily reflecting lower taxable income. The effective tax rate for 2023 was 16.0%, as compared to 21.0% last year. This improvement primarily reflects the benefit of other restructuring.

In 2023, we generated 2023 Adjusted EBITDA of $185.2 million, compared to $267.9 million in 2022. This $82.7 million, or 30.9%, change primarily reflects the $90.6 million decrease in gross profit, partially offset by the $7.9 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, transaction expense and professional fees, and accrued trade duties).

We achieved net income of $36.0 million in 2023, as compared to $128.7 million in 2022. The $92.6 million, or 72.0%, decline was primarily driven by the $99.9 million decrease in EBITDA, $15.5 million increase in net finance expense, and $4.4 million increase in depreciation and amortization, partially offset by the $27.3 million decrease in income tax expense.

For the year ended December 31, 2023, we generated basic earnings per share of $1.61, as compared to $5.50 in 2022. Our adjusted net income was $54.4 million, compared to $133.6 million in 2022, resulting in adjusted basic earnings per share of $2.43, as compared to $5.71 in the previous year.

Results from Operations - Three Months Ended December 31, 2023

For the three months ended December 31, 2023, we generated total sales of $514.9 million, as compared to $574.7 million in Q4 2022. The decrease of $59.9 million, or 10.4%, primarily reflects product price deflation with volumes remaining relatively stable year-over-year. Sales results were not significantly impacted by foreign exchange translation of Canadian sales to US dollars for reporting purposes.

Our US operations generated fourth quarter sales of $476.0 million, as compared to $533.2 million in the same period in 2022. The $57.2 million, or 10.7%, decrease primarily reflects product price deflation.

In Canada, fourth quarter sales of C$53.0 million were C$4.0 million, or 7.0%, lower than the same period in 2022. The year-over-year decrease primarily reflects product price deflation, partially offset by higher volumes.

We generated fourth quarter gross profit of $111.4 million, compared to $116.2 million in the same period last year. The $4.8 million, or 4.1%, decrease is mainly attributed to lower sales, partially offset by a higher gross margin percentage. Our fourth quarter gross margin percentage increased to 21.6%, from 20.2% in Q4 2022. This improvement was supported by reduced inventory write-downs of $2.4 million in the current quarter, compared to $7.5 million in Q4 2022.

Fourth quarter operating expense decreased by $5.5 million, or 6.0%, year-over-year to $86.1 million, while operating expenses as a percentage of sales were 16.7% as compared to 15.9% in the same period last year. The reduction in operating expenses primarily reflects lower staffing costs, including a reduction in variable compensation, and a decrease in premises costs.

For the three months ended December 31, 2023, depreciation and amortization increased to $17.7 million, from $16.9 million in Q4 2022. Included in the $17.7 million was $5.5 million of amortization on acquired intangible assets, consistent with the same period last year.

For the three months ended December 31, 2023, net finance expense decreased to $12.4 million, from $13.8 million in Q4 2022. This included $8.8 million of interest on bank borrowing, as compared to $9.7 million in Q4 2022. The decrease in interest expense primarily reflects lower bank indebtedness, partially offset by higher interest rates.

For the three months ended December 31, 2023, we recognized an income tax expense of $3.8 million, compared to an income tax recovery of $2.5 million in the same period last year.

Fourth quarter Adjusted EBITDA increased to $44.5 million, from $43.6 million in the same period in 2022. This $0.9 million, or 2.0%, year-over-year improvement largely reflects the $5.7 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, and transaction expense and professional fees), partially offset by the $4.8 million decrease in gross profit.

Net income for the fourth quarter of 2023 was $9.0 million (basic earnings per share of $0.40), as compared to $13.4 million (basic earnings per share of $0.59) in Q4 2022. The $4.4 million, or 32.8%, decrease was driven by the $6.4 million increase in income tax expense and the $0.8 million increase in depreciation and amortization, partially offset by the $1.5 million increase in EBITDA and $1.3 million decrease in net finance expense.

We generated fourth quarter adjusted net income of $10.3 million, as compared to $15.0 million in Q4 2022. Adjusted basic earnings per share were $0.46, as compared to $0.66 in Q4 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 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, transaction expenses, and accrued trade duties. 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 long term incentive plan ("LTIP") expense, professional fees, transaction expenses, and accrued trade duties. 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 US 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 US 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, 2023 (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 is included, but not limited to: We ended the year with significant unused borrowing capacity, which will enable us to continue to manage short-term economic headwinds, fund anticipated future growth and continue executing on our strategies; our capital allocation priorities going forward will include a continued focus on repayment of debt and growth through acquisitions; the inflation and interest rate hikes of recent years are expected to continue to moderately impact economic activity; while our sales volumes have stabilized in recent quarters, we continue to experience softness in product pricing; forecasters are anticipating a stable environment for residential construction in 2024 and a flat-to-lower year for the repair and remodel market; we expect first quarter 2024 sales to be lower than the same period in 2023, with higher volumes being offset by weaker product prices year-over-year; sales comparisons to 2023 are expected to improve in the latter half of the year; in this environment, we anticipate modest growth in 2024 Adjusted EBITDA, driven by continued gross margin strength and disciplined management of operating expenses; as we have demonstrated in previous business cycles and most recently in 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 is expected to continue converting 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 our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock; forecasters are also anticipating potential interest rate cuts in the later half of 2024, which could further support end-market demand for our products; we continue to see a multi-year runway for growth in the repair and remodel, residential, and commercial markets we participate in; we also do not expect the market to grow meaningfully in 2024; our business requires an ongoing investment in working capital; our investment in working capital may fluctuate from quarter-to-quarter based on factors such as sales demand, strategic purchasing decisions taken by management, and the timing of collections from customers; historically, the first and fourth quarters can be seasonally slower periods for construction activity, resulting in reduced demand for architectural building products; our debt management strategy is to repay a portion of our credit facilities related to acquisitions, and maintain a base level of debt as part of our capital structure; our intent is to roll and renew our credit facilities when they expire; we do not intend to restrict future dividends in order to fully extinguish our debt obligations upon their maturity; the amount of debt that will actually be drawn on our available revolving credit facilities will depend upon the seasonal and cyclical needs of the business and our cash generating capacity going forward; when making future dividend and share repurchase decisions, we will consider the amount of financial leverage, and therefore debt, we believe is appropriate given existing and expected market conditions and available business opportunities; we do not target a specific financial leverage amount; we believe our current credit facilities are sufficient to finance our working capital needs and market expansion strategy; and we intend to issue common shares from treasury to settle the portion of the obligation not paid to employees in cash.

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 US 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 US dollar could affect our performance; our results are dependent upon the general state of the economy; the 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 December 31, 2023, each of which are available on the Company's profile at www.sedarplus.ca

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 our management as of the date of this news release. The financial outlook is provided for the purpose of providing readers with an understanding of our 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.

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