Hardwoods Distribution's Q2 net profit up 1.1% year-over-year to C$1.5M on 8.6% increase in revenue to C$56.7M despite weak demand, strong competition, increased operating expenses
Kendall Sinclair
LANGLEY, British Columbia
,
August 9, 2011
(press release)
–
A conference call to discuss second quarter 2011 financial results will be held on Tuesday, August 9, 2011 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-888-231-8191 or 647-427-7450. A replay will be available until August 26, 2011 at: 1-855-859-2056 or 416-849-0833 (Passcode 85298376 followed by the number sign).
This press release discusses financial results for Hardwoods Distribution Income Fund (the "Fund") for the three and six-month periods ended June 30, 2011. During these periods, the Fund held, indirectly, securities which represented an 80% ownership interest in Hardwoods Specialty Products LP and Hardwoods Specialty Products US LP (collectively, "Hardwoods").
Subsequent to the end of the second quarter, the Fund was converted to a publicly traded corporation named Hardwoods Distribution Inc. ("HDI" or the "Company"). As part of that process, unitholders of the Fund exchanged their units for common shares of Hardwoods Distribution Inc. on a one-for-one basis. Concurrently, HDI acquired the remaining 20% interest in the securities of Hardwoods that the Fund did not previously own, and the Fund was wound up into HDI. Hardwoods Distribution Inc. now owns 100% of Hardwoods, and trades on the Toronto Stock Exchange under the symbol HWD.
HDI is one of North America's largest wholesale distributors of hardwood lumber and related sheet good products, operating a network of 26 distribution centres in the US and Canada.
Second Quarter Highlights
(For the three months ended June 30, 2011)
"Our market expansion strategies continued to drive sales growth in both the second quarter and first half of 2011," said Lance Blanco, President and CEO of Hardwoods. "The addition of experienced sales reps in high-potential markets, our increased emphasis on the commercial and institutional markets, and successful leveraging of our import program were key factors in the 8.6% and 8.0% year-over-year increase in sales for the second quarter and first six months respectively. This is the fifth consecutive quarter in which we have improved our sales performance compared to the same quarter in the previous year."
"We view these gains as significant given the negative impact of a stronger Canadian dollar and continued weakness in the US residential construction market. While new housing starts increased to a seasonally adjusted rate of 629,000 units in June according the US Census Bureau, this is still roughly half the 1.2 million homes per year that economists say must be built to reflect a long term sustainable housing market. Hardwood lumber pricing also remained flat, although we were able to capitalize on slightly stronger prices for sheet goods with increased volumes of imported products."
"I am pleased to report that our higher sales contributed to improved second quarter gross profit, EBITDA, profit and Distributable Cash results. This was despite a slight reduction in gross margins and an increase in operating expense. Our margins continue to be constrained by a combination of weak market demand and strong competition, but remain in line with our expectations for this point in the market cycle. The higher operating costs reflect increased staffing to support sales growth and non-recurring expenses related to our recent conversion to a corporation. Six-month operating costs also reflect the absence of a one-time $0.3 million recovery from a lawsuit settlement that helped reduce our 2010 first half expense results. Factoring out the impact of these unusual items, our second quarter and year-to-date Distributable Cash performance would have improved by 25% in both periods, as demonstrated in the table below."
"Overall we are encouraged by our improving results and by our increased ability to generate cash. Based on this performance, our Board of Directors has declared a quarterly dividend of $0.02 per share to be paid on October 31st of this year. The decision to initiate a dividend reflects our confidence in our ability to continue generating improved performance for our investors," said Mr. Blanco.
Summary of Results
Results from Operations - Three Months Ended June 30, 2011
For the three months ended June 30, 2011, total sales increased by 8.6% to $56.7 million, from $52.2 million in Q2 2010. The year-over-year sales growth reflects a 12.7% increase in underlying sales activity, partially offset by a 4.1% decrease in sales due to the negative effect of a stronger Canadian dollar on US sales. Sales in the United States, as measured in US dollars, increased by 16.8% to $35.5 million. Sales in Canada, a market which experienced more stable ongoing demand for hardwoods through the recent economic downturn, increased by 6.6% to $22.4 million.
Second quarter gross profit increased to $10.1 million, from $9.3 million in Q2 2010. This reflects the higher sales revenue, partially offset by a slightly lower gross profit margin. Gross profit as a percentage of sales was 17.8%, compared to 17.9% in Q2 2010. Management views a 17.8% gross margin as appropriate given competitive conditions at this point in the business cycle.
Operating expenses in the second quarter were $7.8 million, compared to $7.3 million during the same period in 2010. The most significant contributor to the increase in operating expenses was $0.3 million related to the conversion of the Fund to a corporation. The balance primarily reflects higher personnel costs related to Hardwoods' market expansion strategies.
Second quarter EBITDA of $2.5 million, was up 6.5% from $2.4 million during the same period in 2010. This increase reflects higher gross profit, partially offset by higher operating expenses.
For the three months ended June 30, 2011 the Fund and its subsidiaries generated Distributable Cash of $2.4 million, or $0.130 per unit. By comparison, the Fund reported Distributable Cash of $2.1 million or $0.117 per unit in the second quarter of 2010. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units in either period.
Results from Operations - Six Months Ended June 30, 2011
For the six months ended June 30, 2011, total sales increased by 8.0% to $108.7 million, from $100.7 million in the first half of 2010. This performance improvement reflects an 11.8% increase in underlying sales activity, partially offset by a 3.8% decrease in sales due to the negative effect of a stronger Canadian dollar. The improvement in underlying sales reflects increased sheet goods sales, as well as strategic efforts to leverage Hardwoods' import program, add proven industry sales professionals to the staff and diversify the customer base. Sales in the United States, as measured in US dollars, increased by 15.9% to $67.3 million. Sales in Canada, in Canadian dollars, increased by 5.8% to $43 million.
First half gross profit increased to $19.2 million, from $18.0 million in the first six months of 2010. This gain reflects the higher sales revenue, partially offset by a weaker gross profit margin. Gross profit as a percentage of sales was 17.6% in the first half of 2011, in line with expectations, but lower than the 17.8% achieved during the same period in 2010.
First half operating expenses were $16.5 million, compared to $15.0 million during the same period in 2010. The $1.5 million increase in operating expenses reflects increased personnel costs to support higher sales, costs incurred to convert the Fund to a corporation, and the absence of a $0.3 million recovery from a lawsuit settlement that helped reduce first half 2010 expense results.
The Fund reported six-month EBITDA of $3.1 million, compared to $3.6 million during the same period in 2010. The $0.5 million decrease in EBITDA reflects higher operating expenses, partially offset by higher gross profit.
For the six months ended June 30, 2011 the Fund and its subsidiaries generated Distributable Cash of $2.9 million, or $0.160 per unit. By comparison, the Fund reported Distributable Cash of $3.1 million or $0.172 per unit in the first half of 2010. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units in either period.
Outlook
HDI's outlook going forward remains cautious. Although US residential construction activity has improved slightly from a year ago, the pace of new housing starts remains at historically low levels. Industrial and commercial construction markets are faring better, but here too, the pace of recovery is slow.
In Canada, industry forecasts continue to call for a slight dip in Canadian housing starts in 2011 compared to 2010. The stronger Canadian dollar is also having a negative impact on the competitiveness of Canadian manufacturers selling finished products into the US, while also reducing HDI's own selling prices for US-sourced lumber and panels.
Despite these challenges, HDI expects to achieve continued performance improvements in 2011 as it implements its new business strategy. The strategy focuses on:
Increasing end-market diversification with a stronger focus on the commercial and institutional construction markets;
Leveraging of the company's successful import program to grow sales and build market share; and
Achieving increased market share with a sharpened focus on larger, high-potential geographic markets.
Operating expenses are expected to continue trending somewhat higher in 2011 as these strategies are implemented and the Company supports increased sales activity.
Overall, HDI's priorities for the balance of the year remain unchanged with continued focus on executing the strategy while tightly managing the business.
A more detailed discussion of the Fund's financial performance can be found in its Management's Discussion and Analysis (MD&A) for the three months ended June 30, 2011. The MD&A will be posted, along with the Fund's condensed consolidated interim financial statements on SEDAR (www.sedar.com) and on the Fund's website http://www.hardwoods-inc.com.
About Hardwoods Distribution Inc.
Hardwoods Distribution Inc. ("HDI") is a publicly traded company that holds, indirectly, a 100% ownership interest in Hardwoods Specialty Products LP and Hardwoods Specialty Products US LP (collectively, "Hardwoods" or the "Business"). Formerly the Hardwoods Distribution Income Fund (the "Fund"), HDI was formed by the Fund in order to convert from an income trust structure to a corporation. The Fund was converted to a corporation by way of a plan of arrangement effective July 1, 2011.
Pursuant to the conversion, all outstanding units of the Fund held by unitholders were exchanged for common shares of Hardwoods Distribution Inc. on a one-for-one basis. All of the Class B limited partner units in the Fund's operating subsidiaries, which represented a 20% equity interest in Hardwoods and were held by the former owners of the Business, were exchanged for common shares of Hardwoods Distribution Inc. on the basis of 0.3793 common shares per Class B limited partner unit. As a result of these arrangements, Hardwoods Distribution Inc. owns 100% of Hardwoods, whereas previously the Fund owned 80% of the Business, and the Fund has been wound up into HDI. Hardwoods Distribution Inc. is listed on the Toronto Stock Exchange and trades under the symbol HWD.
HDI's results are based upon the performance of Hardwoods.
About Hardwoods
Hardwoods is one of North America's largest distributors of high-grade hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture and specialty wood products industries. The Company currently operates a network of 26 distribution centers in the U.S. and Canada.
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