ADENTRA Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2025

There are 3 speakers on the call.

Operator

Good morning. My name is Marissa, and I will be your conference operator today. I would like to welcome everyone to the Odentra First Quarter twenty twenty five Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

To ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, please press star then the number 2. With me on the call are Rob Brown, Adentra's president and CEO, and Suss Carmele, vice president and CFO. Adentra's q one twenty twenty five earnings release, financial statements, MD and A, and other quarterly filings are available on the Investors section of our website at www.addentragroup.com. These statements have also been filed on Adentra's profile on Cedar Plus at www.cedarplus.ca.

Operator

I want to remind listeners that management's comments during this call may include forward looking statements. These statements involve various known and unknown risks and uncertainties and are based on management's current expectations and beliefs, which may prove to be incorrect. Actual results could differ materially from those described in these forward looking statements. Please refer to the text in Edentra's earnings press release and financial filings for a discussion of the risks and uncertainties associated with these forward looking statements. All dollar figures referred to today are in U.

Operator

S. Dollars unless otherwise stated. I would now like to turn the call over to Rob Brown.

Speaker 1

Good morning, everyone, and thank you for joining us today. In the first quarter of twenty twenty five, our team displayed strong operating discipline. We kept pricing stable, maintained solid gross margins, and continued to manage expenses carefully. That said, the quarter wasn't without challenges, and our volumes were impacted by tough winter weather, persistent affordability pressures, and some softness in residential construction. Residential construction conditions reflect elevated US mortgage rates and growing macro uncertainty, especially around the volatile US trade environment.

Speaker 1

Total sales were up modestly supported by the contribution from Wolfe Distributing. On the organic side, sales were down by 4%, driven by lower volumes resulting from the challenges noted. The good news is that product pricing held steady, a positive shift after experiencing deflationary pressure over the past two years. Gross margin was consistent with our full year performance in 2024. This speaks to the strength of our business model and the discipline we continue to apply in both procurement and pricing.

Speaker 1

On the cost side, we continue to manage things efficiently, and the increase in operating expenses was primarily attributable to operating expenses associated with Wolf. We delivered 40,000,000 in adjusted EBITDA with a 7.4% margin and adjusted EPS of 42¢, showing resilience despite lower volumes and some fixed cost pressure. In the first quarter, we built inventory ahead of the spring selling season as is our normal practice. We also took additional stocking positions in certain areas as a precaution against potential trade disruptions. This was a measured approach, and it increased our leverage temporarily.

Speaker 1

We expect that to decrease as inventory is sold through the balance of the year. I now wanna touch on trade. We estimate that 8% of our product mix is subject to current tariff actions at an average rate of 10%. Additionally, there's an ongoing section two three two investigation to determine the effects on US national security of imports of timber, lumber, and derivative products. We estimate that the proportion of our product mix impacted by tariffs could rise to 35% if section two three two tariffs are imposed.

Speaker 1

Our model is well equipped to manage potential tariffs. We operate a price pass through model and expect to offset tariff related product costs through an increase in selling prices. Moreover, our global sourcing network spans 30 countries, offering a diverse range of product options for our customers. And finally, we are often the largest or one of the largest customers of our domestic vendor partners, which ensures a robust domestic supply to the extent our customers choose a US supply solution versus an offshore one. With that, I'll turn the call over to Fez Carmally, who will take you through the financials in more detail.

Speaker 1

Fez?

Speaker 2

Thanks, Rob, and good morning, everyone. I'll cover the senior financial highlights. Just a reminder, we report in US dollars. Total sales grew 1.4% driven by the contribution from Wolfe Distributing, which we acquired in July 2024. In The U.

Speaker 2

S, organic sales declined 4.7% due to softer volumes, while in Canada, we delivered 3% growth, supported by modest volume and product pricing gains. Gross margin percentage in the first quarter was 21.6%, reflecting disciplined execution. We continue to manage costs effectively. Total operating expenses increased 6.5%, driven primarily by the addition of Wolf. However, on an organic basis, expenses were up just 1% year over year.

Speaker 2

This is less than the rate of inflation and highlights our ongoing focus on platform efficiency and cost discipline. Adjusted EBITDA was $40,000,000 compared to $45,600,000 in Q1 last year, resulting in a 7.4 adjusted EBITDA margin. Adjusted EPS came in at $0.42 down from $0.76 a year ago, reflecting operating leverage from lower volumes and fixed costs. Turning to cash flow. We saw an outflow from operating activities this quarter, largely due to our seasonal inventory build and proactive positioning and then the potential for trade disruptions.

Speaker 2

This action increased our inventory days by six when compared to the same period in the prior year and led to a temporary increase in our net debt to pro form a EBITDA, which ended the quarter at three times. Importantly, we had over $360,000,000 in available liquidity at quarter end, providing ample flexibility to navigate the current environment. We expect leverage to trend lower as we move through the seasonally stronger building period and convert inventory into cash. Lastly, we remain disciplined in how we deploy capital. We returned $4,500,000 to shareholders through dividends and buybacks.

Speaker 2

On May 6, the Board approved a quarterly dividend of $0.15 per share, continuing our strong track record of shareholder returns. To the April, we have repurchased approximately 250,000 shares under our NCIB, reflecting our opportunistic approach when market valuations do not reflect intrinsic value. Overall, during the first quarter, we maintained solid margins, exercised strong cost control, preserved a robust liquidity position and positioned ourselves to navigate ongoing macro and trade related headwinds. With that, I'll turn the call back to Rob to talk more about our outlook. Rob?

Speaker 1

Thanks, Svez. Macroeconomic headwinds continue to impact our end markets, notably elevated US mortgage rates, tight housing supply, ongoing trade tensions, and the renewed prospect of inflation, all of which continue to weigh on demand. Considering these factors, we maintain a conservative near term outlook. Our focus is on our strategy, including driving operational efficiency, decreasing days inventory, reducing leverage, and executing on long term growth objectives, drawing on our deep experience navigating varied economic conditions. Our diversified portfolio, national scale, and strong supplier relationships are a competitive advantage.

Speaker 1

We remain confident in the long term fundamentals. Structural underbuilding, favorable demographics, and aging housing stock continued to support demand. As one of the largest two step distributors in a fragmented $43,000,000,000 market, we see significant opportunity ahead. In recognition of the significant shift in macroeconomic environment that has occurred over the past few months, we're transitioning from our destination 2028 fixed five year targets to a full cycle performance framework to reflect average outcomes across the varying market conditions that form an entire economic cycle. Our core priorities remain intact and are reflected in our long term value creation framework consisting of low to mid single digit annual organic growth, annual m and a deployment of 50 to a hundred and 50,000,000, gross margin above 20%, adjusted EBITDA margin of 8% to 10%, and a return on invested capital of 10% to 12%.

Speaker 1

This framework gives us flexibility to execute without being constrained by short term volatility while reinforcing our commitment to long term shareholder value creation. With that, I'll turn the call back to the operator to open the floor for questions. Operator?

Operator

Thank you, Rob. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from asking a question, please press star followed by 2.

Operator

Your first question comes from Nikolay Gorupich with CIBC Capital Markets.

Speaker 1

Over the past few weeks, a lot of the homebuilders have been pointing to a slower than expected spring selling season. I'm curious how are conversations developing with customers in new red end markets? Have your growth organic growth expectations changed at all? Hey. Good morning, Nikolay.

Speaker 1

Yeah. We've seen obviously the same reporting. We we follow the the large homebuilders as they they issue. So we would agree with the comment. Everybody has seemed to walk back expectations, think, with the greater uncertainty, which I highlighted in my opening comments.

Speaker 1

In terms of a slower spring selling season, I mean, we're into the May. I would say that our April was steady and solid. Nothing there to really report, but we do take that as kind of a leading indicator if the homebuilders are saying they're not seeing the pickup to the same extent that they normally would seasonally. So we'll keep our eye on that. We don't know other additional kind of comment or observation to offer at this point relative to our activity levels, but we're well aware.

Speaker 1

Okay. I see. And on a similar note, some of the homebuilders also emphasized various cost cutting or cost management initiatives. Are you seeing any price mix headwinds or customers trading down to premium products or trading down from premium products or anything of that sort? No, we haven't seen that at all.

Speaker 1

I would say, just a reminder, we do carry the full mix. So we've got kind of the good, better, best applications within the product categories that we sell. So if there is a shift, we are well positioned to participate in that, although there may be price margin implications that travel with such a shift, but we've not had that observation so far within our own sales. Thanks, Nikolay.

Operator

And your next question comes from Yuri Zareida at Canaccord Genuity. Please go ahead. Good morning, and thanks for taking my questions. So besides the extended slowdown that I can understand complicating complicated, sorry, achieving the 2028 fixed targets, could you talk to the main factors behind the downward provisions to growth in margins and to whether expectations around types, impact are part of that?

Speaker 1

Yes. So appreciate the question, Yuri. The move away from the destination twenty twenty eight targets, I think, is just prudent and reflects today's macro environment that's just more dynamic. And I think there's a little bit more in terms of question marks what the at least the short to midterm might look like. So going through a full cycle framework, where we measure performance across an economic cycle, we think just gives us flexibility while still preserving accountability and letting people know where we expect the company to perform in more normalized conditions.

Speaker 1

For the most part, it's quite similar to the Destination 28. We have provided a little wider range in some categories in terms of performance just to acknowledge a greater degree of uncertainty. But we still have the commitments around margin and EBITDA and our commitment to inorganic growth or acquisitions growth for the company, the organic that we see as a very strong opportunity for the company. And that was really the thought process around what I think most would acknowledge is a changed macro backdrop.

Operator

That's helpful. And second one from me. Looking at Wolf revenue contributions, they seem quite behind trailing at the time of the acquisition. Could you talk perhaps to that and to the performance of Wolf in general and how you see it evolving going forward?

Speaker 1

Yes. Wolf is two thumbs up. We're very pleased with how that's performed since we bought it. I understand that your look through with Wolf is a little bit more quarter by quarter. What I would say is that is a business that has some seasonality to it because it has a more significant component of decking within its product mix.

Speaker 1

So you're going to see some differences quarter to quarter in terms of their revenue contribution. I would also note that this year, the what we would call the spring buy for decking was not as heavy in the first quarter, but we've seen some catch up on that into the second quarter. So we have no concerns about Wolf. The team is all in place and doing very good work. Your

Operator

next question comes from Zachary Evershed with National Bank. Please go ahead.

Speaker 2

Good morning, everyone. Congrats on the quarter. Hi, Zach. So

Speaker 1

I understand the rationale behind prepositioning the inventory that makes sense with the larger than typical builds. Given the potential for more of a pullback with what we're hearing from homebuilders, how confident are you in being able to unwind that inventory position? Very. I mean, we've we did describe trade disruption, which from our perspective is not just there may be some tariffs on the way, but there is also the possibility of a port strike in January, which we also positioned some inventory incrementally in first quarter. The port strike didn't end up happening, but nonetheless, it was prudent for us to do that to keep customers in stock.

Speaker 1

What I would say about the extra inventory, and I would just emphasize we're talking about six days of extra inventory relative to average daily sales pace, is that it's all in the fast moving, what we call ASKUs. So we feel very confident we'll be able to move that move through that as we move forward. Great color. And then we've touched on the homebuilders. Maybe you could tell us what else you're hearing from other large channel partners, maybe on the retailer side.

Speaker 1

Yes. So I think nothing that would conflict with what the homebuilders are saying. They're also duly watching what's going on there. I would say that in the home center side of things, at least in our aisle, it's been quite steady in kind of the molding and millwork aisles that we manage for key partners. And co dealers are again kind of moving along with what I described earlier, a steady pace, but it is waiting to see just around interest rate policy and impacts on mortgage rates.

Speaker 1

And also as we look at what the large homebuilders are doing, the degree to which they're going to continue to participate in mortgage buy down. So those are all factors that we're hearing from our pro customers. Perfect. Thank you. I'll turn it over.

Operator

Thank you. Your next question comes from Ian Gillies with Stifel. Please go ahead.

Speaker 2

Good morning, everyone.

Speaker 1

Hey, good morning. As it pertains to the financial KPIs and obviously,

Speaker 2

this year

Speaker 1

has been a bit more challenging, but it was good to see that the 10% EBITDA target is still in there. If

Speaker 2

there was

Speaker 1

an uptick in activity or a substantial uptick in activity as we come out of this trough, could you get to that target with the existing business? Or is it predicated on additional M and A that would carry a higher margin from here? No, it's not predicated on that at all. You get some higher activity levels. There's, as you know, significant operating leverage to the P and L.

Speaker 1

And then if you add to that some appreciation on product pricing, at least with our modeling, you can get there without having to rely on some big change in mix or acquisition space. So we do feel comfortable having that within the range as being a very realistic number at points during the cycle. Understood. And one of the things I observed from the plan, from my perspective, it looked like it could be entirely self funded without the need for any sort of external financing or discrete equity. Like, would you concur with that viewpoint?

Speaker 1

Yes. I read your note put out last night, and I was nodding. Our modeling is is similar. It lines lines up with that conclusion. Yes.

Speaker 1

And then the last thing from my perspective, know, I'm fully acknowledging it's challenging to execute M and A in a market like this. But can you provide any context for what vendors are saying at this point? Like, are they frustrated given everything that's going on, perhaps maybe looking to sell or things just depends down? It's just it's obviously a very complicated time. I know there's I wouldn't describe it as there's significant activity, but there's absolutely acquisition opportunities available out there and that are attractive to us.

Speaker 1

It's going to be that coalescing around views of where the economy is going, comfort with our own balance sheet and a target selling that's got the characteristics that would be a good fit for us. So I wouldn't describe us as off market. I think in the disclosure material and in Feza's comments, with the cash flow assumptions that we've got, we, as you know, generate a lot of cash and we can deliver actually quite quickly and create additional room to be participative in acquisitions. So it's not pent down and there are folks out there that are still looking to sell. Often that decision is based on personal circumstance as opposed to market timing.

Speaker 1

So there's usually some activity out there that's available to us. Yeah. Maybe one follow on to that. Is there any competitive advantage that Dentra has going through this process given what I presume is going to be a very complicated customs procedure to bring products in versus some of its, call it, smaller peers that may be more regional in nature? Yes.

Speaker 1

We've described our worldwide sourcing as a competitive advantage in terms of offering choice to customers on a normalized basis. The same will be true in times of market disruption, where we're going to have more options and we're going to have, I could say, more sophistication in terms of being able to manage a dynamic environment, which at this point looks like it will be. So we do think of that as a source of competitive advantage in times of our people that sometimes shine through even more strongly.

Operator

Your next question comes from Frederic Tremblay with Desjardins. Just

Speaker 1

wanted to start maybe on the organic growth trends. You had mentioned in the past in the first two months of the year, we're down around 6%. The full quarter was down around 4%. So that would

Speaker 2

imply that March was quite a

Speaker 1

bit better than January and February. And from that perspective, was wondering if there's anything that you can point out to to explain that improvement and and if that's something that we can maybe extrapolate into q two as well.

Speaker 2

Hi, Fredrik. It's it's Fezz here. I can answer that question. You're right. March was was a better month.

Speaker 2

If we think of the sequential trend, January was the softest. We talked about why that was in our disclosures. As with many others, There there was some significant weather impacts, particularly in January. We do that off to a of a slow start. February was a little better, and March was a little better still.

Speaker 2

These were to clarify from a volumes perspective. Pricing even sequentially through the quarter was was relatively flat. So we did see some pickup in activity through the first quarter. I I would and as you've seen with our cautious tone here, I I would be careful about taking margin extrapolating that forward. As Rob mentioned, it's been a little steady into q two, which is good.

Speaker 2

But, you know, does does does April is April indicative of the next several months? I think in this environment, it's it's maybe prudent to take a bit of a cautious approach approach on that. There was an earlier question about, you know, sort of the the spring selling season, which which Rob mentioned. And, you know, some of the leading indicators we look at would suggest that we we may not see a pickup or a pickup to the same degree in terms of the spring building season. So you're quite right in terms of the the math you've you've done there, but your comment around should be assumed that, you know, April onwards will also be be as strong as March?

Speaker 2

I would maybe just caution that as well.

Speaker 1

Perfect. I appreciate that. And last question on on pricing. Nice to see deflation finally coming to an end in q one. Is that something that you feel is sustainable?

Speaker 1

Or I guess on the opposite side, can we maybe see some inflation as we get through 2025 with the tariffs and other inflationary pressures potential? We could. Absolutely. I think the key pivot point here will be that, section two three two investigation. And, what comes from that, that needs to be concluded by December, which is two seventy days after it was initiated.

Speaker 1

However, we think we'll probably see something before then. And to the degree that, that happens, yes, that would contribute to a larger proportion of our mix being subject to tariffs and price inflation would be passed through as per our normal operating procedure. The question mark, of course, is that how much of a dampener of demand is that I would say that the finishing architectural products that are typical to our product mix are not driving the bus in terms of the cost of a fully constructed home by any means. We're a component part. But if there's widespread inflation across other building materials, that would need to be taken into consideration.

Speaker 1

But all things equal, we are happy that we've seen price stability here for a number of months. And if I were a betting man, I think that the place that we go from here would be up. It's to what degree and with what timing. And, obviously, we don't have to add cost to our business to sell a more expensive product. So there's some good operating leverage for that through the p and l.

Speaker 1

Understood. Thanks for taking the questions.

Speaker 2

You bet.

Operator

There are no further questions at this time. Oh, I've been corrected. Your next question comes from Jonathan Goldman with Scotiabank. Please go ahead.

Speaker 1

Rob, I just want to circle back to make sure I heard correctly. On the April trends, you said they were stable. I'm not sure if that was the exact word you used. But I think if it was, was that stable quarter on quarter or month on month or year on year?

Speaker 2

Jonathan, I can take that. The stable comment was more of a sequential comment. So what we're seeing in terms of pace March through through April. And is it too early

Speaker 1

to have any commentary on what you're seeing through the May?

Speaker 2

I would say it's too early.

Speaker 1

Okay. Fair enough. And then on on the question about pricing, you know, and potentially being passed through. And and, Rob, you did touch on this on kind of the offset being, you know, downside to volumes. Do you have a sense that we can see an acceleration of discounting to the whole industry to support volumes throughout the entire supply chain?

Speaker 1

I don't I don't see that personally. I can only speak for where we're at, which is we provide a very valuable service within the channel and the supply chain, and we've built an infrastructure and capability, and we need to be paid to perform that service. So we have, I would say, commitment to our gross profit margin position. To the extent that there's less volume, we'll have to manage things as all companies do through some cost actions if there's a reduction there. But price appreciation goes a long way, particularly after a period of significant price deflation we've had in the last couple of years.

Speaker 1

Okay. That's good color. Then maybe one more for me. Do you guys have a sense of the pullback in consumer spending? It's more a function of the uncertainty and the confidence issue rather than actually having each right powder to spend on homes.

Speaker 1

That's an interesting one. I I think we have a perspective. A lot of it is driven by sentiment as opposed to an unhealthy consumer balance sheet. So there's just you know, we've even on this phone call, used the word uncertainty a few times, and you can play that back across the economy and across even individual conversations. And I think that's causing people to just hold onto the wall a little bit tighter to see what happens, but I don't think it is reflective of a consumer that doesn't have the meetings and can't turn spending back on once they become a little bit more confident.

Speaker 2

Okay. Thanks for the color.

Speaker 1

Thank you.

Operator

There are no further questions at this time. I'd like to turn the call back over to your host for any closing remarks.

Speaker 1

Okay. Thanks for hosting us today. It's a nice nice job, and thanks, everybody, for calling in and showing interest in Odentura. We're available for further questions. Please reach out to Fezz or myself if we can assist.

Operator

Thank you so much. Ladies and gentlemen, this concludes today's conference call. We appreciate your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
ADENTRA Q1 2025
00:00 / 00:00