LANGLEY, BC - Hardwoods Distribution Inc. ("Hardwoods" or the "Company") today announced strong financial results for the three and nine months ended September 30, 2013. Hardwoods is one of North America's largest wholesale distributors of hardwood lumber and related sheet good products, operating a network of 32 distribution centres in the US and Canada.
(For the three months ended September 30, 2013)
-- Third quarter sales increased $17.7 million, or 22.1%, from the same
period last year
-- Third quarter gross profit increased by 25.6% to $17.6 million
-- Third quarter gross profit margin increased to 18.1% from 17.6% in the
same period last year
-- Third quarter EBITDA increased 59.0% to $5.3 million compared to the
prior year period
-- Profit for the period increased 146.0% to $3.1 million compared to the
same quarter last year
-- The Board of Directors approved a quarterly dividend of $0.035 per share,
payable on January 31, 2014 to shareholders of record as at January 20,
2014 "We continued to grow the business in the third quarter of 2013, achieving our best quarterly sales result in over eight years while maintaining strong profitability," said Lance Blanco, President and CEO of Hardwoods.
The recovering US residential construction market was a key factor in the year-over-year gains. According to the US Census Bureau, the seasonally adjusted annual rate of US housing averaged 887,000 starts during July and August of 2013, up 19% from 745,000 in the same period last year. With nearly three quarters of its business in the US, and approximately half of its US sales focused on new residential construction, Hardwoods is well positioned to benefit from this recovery.
In contrast, the seasonally adjusted rate of Canadian housing starts was down 12.6% at the end of the third quarter, compared to the same period last year, according to Canada Mortgage and Housing Corporation. The decline was anticipated and reflects the impact of tighter mortgage insurance rules implemented to cool the housing market. Despite the reduction in market activity, Hardwoods' third quarter Canadian sales grew by 9.4% year-over-year, primarily due to higher product prices. According to the Hardwood Lumber Review, average prices for hardwood lumber products were up approximately 14% in the third quarter of 2013, compared to the same period in 2012.
"Our increased sales volumes, together with higher product prices, contributed to strong EBITDA results," added Mr. Blanco. "Third quarter EBITDA climbed 59.0% year-over-year to $5.3 million, bringing year-to-date EBITDA to $17.2 million. This is a very strong result for our business. Gross profit margin, meanwhile, returned to a more sustainable level in the third quarter, after rising to an unusually high 18.9% in the second quarter during a period of rapid product price escalation. At 18.1%, third quarter 2013 gross profit margin was in line with our expectations, and exceeded the 17.6% we achieved during the same period in 2012. We consider a gross margin percentage of approximately 18% to be a sustainable level for our operations under normal business conditions."
"As we approach the final part of the 2013 year, we are fully on track with our business strategy implementation. We have been very successful in capturing growth in the recovering US residential construction market and we are making steady inroads into the commercial and institutional construction market."
"We are also continuing to leverage our import strengths. We have now completed integration of the new Leland hardwood lumber import business and we are already seeing benefits. Acquired in the second quarter of 2013, this new business builds on our import product sourcing capabilities and supports our entire branch network with access to high-margin, tropical lumber products from Africa and South America."
"I should note that we do not yet know the full impact that the recent dismissal of the trade case against hardwood plywood panels manufactured in China and imported into the US will have. In the short term a period of upset conditions may arise in U.S. hardwood plywood markets as product prices and availability adjust for this latest trade development. That said, given our established high quality import product line from China, in the long run this is a very positive development for Hardwoods."
"Overall, we are optimistic about the business and we are pleased to announce another quarterly dividend of $0.035 per share," said Mr. Blanco.
Summary of Results
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars except where noted) 3 months 3 months 9 months 9 months ended ended ended ended September September September 30 30 30 September 30 2013 2012 2013 2012 -------- -------- -------- ------------ Total sales $ 97,546 $ 79,862 $ 280,146 $ 231,954 Sales in the US (US$) 70,081 57,421 203,528 164,207 Sales in Canada 24,812 22,672 71,856 67,369 Gross profit 17,647 14,048 51,628 41,052 Gross profit % 18.1% 17.6% 18.4% 17.7% Operating expenses (12,753) (11,047) (35,522) (32,038) Profit from operating activities 4,894 3,001 16,106 9,014 Add: Depreciation 375 312 1,046 926 Earnings before interest, taxes, depreciation and amortization ("EBITDA") 5,269 3,313 $ 17,152 $ 9,940 Add (deduct): Depreciation (375) (312) (1,046) (926) Net finance cost (372) (574) (103) (779) Income tax expense (1,413) (1,163) (5,311) (3,369) Profit for the period $ 3,109 $ 1,264 $ 10,692 $ 4,866 Basic profit per share/unit $ 0.19 $ 0.08 $ 0.65 $ 0.30 Fully diluted profit per share/unit 0.19 0.08 0.64 0.30 Average Canadian dollar exchange rate for one US dollar 1.038 0.995 1.023 1.002
Results from Operations - Three Months Ended September 30, 2013
For the three months ended September 30, 2013, total sales increased by 22.1% to $97.5 million, from $79.9 million during the same period in 2012. Organic growth from existing operations accounted for $16.9 million of the sales increase. The new import lumber business in Leland, NC acquired on May 30, 2013, contributed the remaining $0.8 million of increased sales.
Sales in the United States, as measured in US dollars, increased by $12.7 million, or 22.0%, to $70.1 million. This growth reflects higher sales volumes related to increased demand from the US residential construction market. Product prices also increased, reflecting the shift to higher market demand, as well as the impact of the newly imposed duties on hardwood plywood imported from China. Sales in Canada increased by $2.1 million, or 9.4%, to $24.8 million. This improvement reflects the higher product pricing, partially offset by weaker volume demand in Canada.
Third quarter gross profit increased to $17.6 million, up 25.6% from $14.0 million during the same period last year. This improvement reflects the higher sales revenue, together with an increase in gross profit margin. As a percentage of sales, third quarter gross profit increased to 18.1%, from 17.6% in the third quarter of 2012.
Operating expenses for the three-month period increased to $12.8 million, from $11.0 million in the third quarter of 2012. This 15.4% increase primarily reflects additional personnel costs, warehouse expense and bad debts associated with the 22.1% increase in sales. As a percentage of sales, third quarter 2013 operating expenses improved to 13.1% of sales from 13.8% in 2012.
Third quarter EBITDA increased 59.0% to $5.3 million, from $3.3 million during the same period in 2012. The EBITDA gain reflects the significant increase in gross profit, partially offset by higher expenses. Profit for the period increased to $3.1 million from $1.3 million, reflecting the $1.8 million increase in EBITDA and $0.2 million decrease in net finance costs, partially offset by a $0.3 million increase in income tax expense.
Results from Operations - Nine Months Ended September 30, 2013
For the nine months ended September 30, 2013, total sales increased by 20.8% to $280.1 million, from $232.0 million during the first nine months of 2012. Growth in sales was predominantly driven by Hardwoods' US operations, where year-to-date sales revenue increased by US$39.3 million. Substantially all of the sales increase came from organic growth, with just US$1.2 million attributed to sales from newly acquired operations. The strong US organic growth reflects increased volume demand and higher product pricing related to improved housing market conditions. Nine month sales in Canada increased by $4.5 million, or 6.7% year over-year, with stronger product pricing helping to offset the impact of weaker volume demand.
Year-to-date gross profit increased 25.8% to $51.6 million, from $41.1 million in the first nine months of 2012. This improvement reflects increased sales and a higher gross margin percentage. As a percentage of sales, gross profit was 18.4% in the first nine months of 2013, compared to 17.7% during the same period in 2012. The stronger gross profit margin reflects the short-term benefits of selling lower-cost inventory into a rising price market in 2013. Over the longer term, Hardwoods considers 18% to be a more typical gross profit margin for the business.
Operating expenses increased to $35.5 million in the first nine months of 2013, from $32.0 million during the same period in 2012. This 10.9% increase was undertaken to support the 20.8% year-over-year growth in Hardwoods' sales. As a percentage of sales, nine month operating expenses declined to 12.7% of sales, from 13.8% during the same period in 2012.
EBITDA for the nine months ended September 30, 2013 increased to $17.2 million, from $9.9 million during the same period in 2012. The 72.6% gain reflects higher gross profit, partially offset by increased expenses. Profit for the period also strengthened significantly, increasing 119.7% to $10.7 million from $4.9 million in the first nine months of 2012. The $5.8 million year-over-year improvement reflects the $7.2 million increase in EBITDA and a $0.7 million decrease in net finance cost, partially offset by a $0.1 million increase in depreciation expense and a $1.9 million increase in income tax expense.
Hardwoods anticipates that market conditions will remain strong through the balance of 2013, but that the business will experience the usual seasonal fourth quarter slowdown as customer activity slows during the Thanksgiving and Christmas holiday periods.
Although some forecasters have become more cautious in their expectations for the pace of continued recovery in US housing starts, most continue to predict a multi-year improving trend for the US residential construction market. Given that hardwood products are typically applied at the final stages of house construction (approximately 9-to-12 months after house construction starts), the Company expects to see higher demand for its products continuing at least through 2014.
The short term outlook for the US market is tempered by uncertainty over the impact of the recently announced trade decision which dismissed the antidumping and countervailing duties case against imported hardwood plywood from China. Hardwoods' considers a period of upset conditions may arise as U.S. hardwood plywood markets adjust for this latest trade development. The rise of hardwood plywood prices in 2013 has in part reflected the impact of duties which were imposed earlier in the trade investigation. If eliminating the threat of duties results in downward pressure to U.S. hardwood plywood prices, this could reduce Hardwoods gross profit margin in the next several months while markets adjust. In contrast the Company is evaluating the extent to which Hardwoods may be eligible for a refund of duty deposits paid on a portion of import purchases made from China in 2013. It is too early to determine any potential duty refund amount, as well as what impact the dismissal of the trade case against Chinese plywood will have on short term hardwood plywood pricing and margins. In the longer term however, given Hardwoods established high quality import product line from China, the dismissal of this trade case is considered very positive for the business.
The outlook for the Canadian market remains neutral, with 2013 housing starts expected to remain below 2012 levels as a result of Canada's tighter mortgage insurance rules. Growth in the Canadian renovation and commercial construction markets is expected to be modest in the 3% to 4% annual range.
Hardwoods' primary goal at this point in the market cycle continues to be capturing the US growth potential, both in terms of sales volumes and product pricing. As we close out the third year of our successful market expansion strategy, the Company is focussed on:
1. Leveraging its ability to source high-quality products from a range of international markets. 2. Strengthening its presence in commercial and institutional construction markets. 3. Solidifying its presence in large geographic markets, primarily through the introduction of new products, and through the expansion of production capabilities at the Paxton branches.
"Overall our outlook remains positive," said Mr. Blanco. "We are successfully optimizing and growing the business organically, and we will continue to pursue well-priced, strategic acquisition opportunities."
A more detailed discussion of the Company's financial performance can be found in its Management's Discussion and Analysis (MD&A) for the three and nine months ended September 30, 2013. The MD&A will be posted, along with the Company's condensed consolidated interim financial statements on SEDAR (www.sedar.com) and on the Company's website http://www.hardwoods-inc.com.
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. 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, 2013 available at www.sedar.com and the Summary of Results section of this news release.
Source: Hardwoods Distribution Inc.
Have something to say? Share your thoughts with us in the comments below.