Hardwoods Distribution narrows Q3 profit to C$1.3M from C$5.6M a year earlier on sales up 39.2% to C$79.9M; CEO cites 54.4% increase in US operations reflecting sales growth of 22.5% and acquisition-related growth of 31.9%
Wendy Lisney
LANGLEY, BritishColumbia
,
November 6, 2012
(press release)
–
Hardwoods Distribution Inc. ("Hardwoods" or the "Company") today announced strong financial results for the three and nine months ended September 30, 2012. Hardwoods is one of North America's largest wholesale distributors of hardwood lumber and related sheet good products, operating a network of 31 distribution centres in the US and Canada.
Key priorities for the balance of the year will be to continue executing the Company's growth and operating strategies, including seeking out acquisition opportunities that further increase shareholder value.
Highlights
(For the three months ended September 30, 2012)
"Improving markets and continued implementation of our business strategy contributed to another strong quarter for Hardwoods Distribution Inc.," said Lance Blanco, President and CEO. "Our revenue, gross profit and EBITDA results were all up significantly compared to the same period last year."
The continued strengthening of Hardwoods' results reflects improvements in US market conditions, and more specifically Hardwoods' ability to tap this growing demand. According to the US Census Bureau, the seasonally adjusted annual rate of housing starts climbed to 872,000 in September 2012, the highest level achieved in four years. Demand from the US recreational vehicle (RV) manufacturing sector which uses significant volumes of hardwoods was also strong, and commercial construction demand remained solid.
"We recognized that the market was set to strengthen and began investing in preparation last year. The addition of new sales personnel, our September 2011 acquisition of the Frank Paxton Lumber Company ("Paxton"), and the continued expansion of our high-quality import product line have all positioned us to capitalize fully on the improving demand. In the third quarter our US operations, as measured in US dollars, grew by 54.4% compared to the same period in the prior year, reflecting organic sales growth of 22.5% and acquisition-related growth of 31.9%," said Mr. Blanco.
The Canadian residential construction market was generally less affected by the economic downturn, and as such, the Canadian market is not experiencing the same demand gains seen in the US. However Hardwoods' strategies have continued to build sales for the Company in Canada. As a result of these efforts, Hardwoods' Canadian operations achieved organic growth of 8.4% during the third quarter with sales gains in all regions.
Despite improving market demand, competition remained intense during the third quarter and first nine months, continuing to constrain product prices and margins. The addition of Paxton's value-added products helped to sustain gross profit margins at 17.6% in the third quarter and 17.7% for the first nine months, in line with a year ago. Profit, while benefitting from the improved EBITDA results, was lower year-over-year primarily due to income tax recoveries arising from Hardwoods' conversion to a corporation and the acquisition of Paxton in 2011, events which were not repeated in the current year period.
"Overall, we are pleased with our results and encouraged by the rebound underway in the US residential construction market. We are aware, however, that housing starts have a long way to go before they return to normal historical levels, and economic conditions remain fragile in the US," said Mr. Blanco. "In the near term, we will continue to focus on capturing available market related growth and to rely on our strategic initiatives to drive performance improvements. We will also continue to evaluate acquisition opportunities in search of an attractive target that provides a strong strategic fit."
Summary of Results
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars except where noted)
3 months ended
3 months ended
9 months ended
9 months ended
30-Sep
30-Sep
30-Sep
30-Sep
2012
2011
2012
2011
Total sales
$
79,862
$
57,372
$
231,954
$
166,120
Sales in the US (US$)
57,421
37,187
164,207
104,477
Sales in Canada
22,672
20,908
67,369
63,921
Gross profit
14,048
10,121
41,052
29,305
Gross profit %
17.6%
17.6%
17.7%
17.6%
Operating expenses
(11,047)
(8,412)
(32,038)
(24,946)
Profit from operating activities
3,001
1,709
9,014
4,359
Add: Depreciation
312
219
926
669
Earnings before interest, taxes, depreciation and
amortization and non-controlling interest ("EBITDA")
$
3,313
$
1,928
$
9,940
$
5,028
Add (deduct):
Depreciation
(312)
(219)
(926)
(669)
Net finance income (cost)
(574)
725
(779)
(57)
Income tax (expense) recovery
(1,163)
3,171
(3,369)
2,113
Profit for the period
$
1,264
$
5,605
$
4,866
$
6,415
Basic profit per share/unit
$
0.08
$
0.35
$
0.30
$
0.43
Fully diluted profit per share/unit
0.08
0.35
0.30
0.42
Average Canadian dollar exchange rate for one US dollar
0.995
0.9810
1.002
0.978
Results from Operations - Three Months Ended September 30, 2012
For the three months ended September 30, 2012, total sales increased by 39.2% to $79.9 million, from $57.4 million in Q3 2011.
Sales in the United States, as measured in US dollars, increased by US$20.2 million, or 54.4%, to US$57.4 million. Included in this increase was approximately US$12.3 million of revenue generated by the Paxton branches. The remaining US$7.9 million of US sales growth was generated by Hardwoods' existing US branch network. Hardwoods' California operations continued to grow sales with a resurgence of regional market demand leading to the re-opening of the Sacramento branch during the quarter. Hardwoods also capitalized on strong RV manufacturing activity in the Lakes District region and continued strong demand in Texas.
Hardwoods' Canadian operations achieved sales growth of $1.8 million or 8.4% with sales increasing to $22.7 million. The Company's branch locations cover from BC through to Ontario, and all regions reported year-over-year sales growth during the period.
Third quarter gross profit increased to $14.0 million, up 38.8% from $10.1 million as a result of higher sales revenues and stable gross profit margin. As a percentage of sales, gross profit was 17.6%, unchanged from the third quarter of 2011.
Operating expenses for the three-month period increased to $11.0 million, from $8.4 million in Q3 2011, primarily reflecting incremental expenses from the acquired Paxton operations. As a percentage of sales, third quarter 2012 operating expenses were 13.8% of sales, down from 14.7% in 2011, reflecting economies of scale related to the larger operations and continued cost management throughout the Company.
Third quarter EBITDA increased 72.8% to $3.3 million, from $1.9 million during the same period in 2011. The significant improvement in EBITDA reflects the $3.9 million increase in gross profit, partially offset by increased expenses.
Profit for the period was $1.3 million, compared to $5.6 million during the same period in 2011. The $4.3 million decrease in profit reflects a $4.3 million decrease in income tax recovery, a $1.3 million decrease in net finance income and a $0.1 million increase in depreciation, partially offset by higher EBITDA.
Results from Operations - Nine Months Ended September 30, 2012
For the nine months ended September 30, 2012, total sales increased by 39.6% to $232.0 million, from $166.1 million in the first nine months of 2011. The growth in sales came predominantly from Hardwoods' US operations, where sales activity increased by US$59.7 million. Revenue from the Paxton business contributed US$40.6 million of the sales growth with the remaining US$19.1 million generated by Hardwoods existing US branch network. The 18.3% organic growth in sales from our US operations reflects improved market conditions as well as the benefits of strategy implementation. Sales in Canada, in Canadian dollars, increased by $3.5 million, or 5.4%, to $67.4 million.
Year-to-date gross profit increased 40.1% to $41.1 million, from $29.3 million in the first nine months of 2011. This gain reflects the higher sales revenue and a slightly higher gross margin percentage. As a percentage of sales, gross profit was 17.7% in the first nine months of 2011, compared to 17.6% during the same period in 2011. The addition of Paxton's in-house remanufacturing capability has added value to Hardwoods' product mix and been a positive influence on average gross profit margin.
Operating expenses were $32.0 million, compared to $24.9 million during the same period in 2011. The increase primarily reflects $7.2 million of incremental expenses from the acquired Paxton operations. As a percentage of sales, operating expenses for the first nine months were 13.8% of sales, compared to 15.0% during the same period in 2011.
Year-to-date EBITDA increased to $9.9 million, from $5.0 million during the first nine months of 2011. The 97.7% gain reflects higher gross profit, partially offset by increased expenses. Profit for the period was $4.9 million, compared to profit of $6.4 million during the same period in 2011. This change reflects a $5.5 million increase in income tax expense, a $0.7 million increase in net finance costs and a $0.2 million increase in depreciation expense, partially offset by the $4.9 million increase in EBITDA.
Outlook
Forecasters predict that US housing starts will continue to benefit from stabilizing house prices, low mortgage rates and near record low home inventories over the next year, and are predicting rates of growth for 2013 similar to those experienced in 2012. Given that hardwood products are typically applied at the final stages of house construction (typically 9 to 12 months after house construction begins), Hardwoods expects to see higher demand for its products continuing well into 2014. The outlook for the US repair and remodeling market is also positive with growth of 5% or better forecast for 2013 by Harvard's Joint Center for Housing Studies. Indicators for commercial construction are for continued steady growth of 2% to 5% in 2013.
The positive outlook for the US housing market is tempered by fragility in the broader US economy and ongoing concerns related to high unemployment, high levels of US government debt and the risk of macroeconomic shock from Europe's debt crisis. In addition, on September 27, 2012, an antidumping and countervailing duty case was initiated in the US against imported hardwood plywood panels produced in China. If trade duties were levied against Chinese hardwood plywood, this would impact Hardwood's business in the United States. These impacts may include material changes to the selling prices, margins, and/or product supply availability of both imported and domestically manufactured hardwood plywood. Hardwoods is closely monitoring proceedings in the trade dispute and investigating a range of alternative supply solutions for our customers should it become necessary. However, the resulting impact on markets and therefore on Hardwoods business cannot be determined at this time. It is estimated that sales of hardwood plywood imported from China for resale to the Company's customers located in the United States comprised approximately 14.6% of Hardwoods total revenues in the third quarter of 2012 and 13.5% in the first nine months of 2012.
The outlook for the Canadian market is also cautious with housing starts expected to decline slightly in 2013 according to the Canadian Mortgage and Housing Corporation. Modest growth is expected to continue in the renovation and commercial construction markets in the range of 3% to 4% annually.
Given the mixed market influences, Hardwoods' will continue to focus on capturing available market related growth and to rely on its' strategies to drive ongoing performance improvements. Specifically, the Company will continue to:
Non-GAAP Measures - EBITDA
References to "EBITDA" are to earnings before interest, income taxes, depreciation and amortization, where interest is defined as net finance income or costs as per the consolidated statement of comprehensive income. In addition to profit or loss, the Company considers EBITDA to be a useful supplemental measure of a company's ability to meet debt service and capital expenditure requirements, and the Company interprets trends in EBITDA as an indicator of relative operating performance.
EBITDA is not an earnings measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS. Investors are cautioned that EBITDA should not replace profit or loss or cash flows (as determined in accordance with IFRS) as an indicator of our performance. The Company's method of calculating EBITDA may differ from the methods used by other issuers. Therefore, the Company's EBITDA may not be comparable to similar measures presented by other issuers. For a reconciliation between EBITDA and profit or loss as determined in accordance with IFRS, please refer to the discussion of Results of Operations described in section 3.0 of Management's Discussion and Analysis (MD&A) for the three and nine months ended September 30, 2012.
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