ADENTRA Inc.

Good morning. My name is Ludi and I will be your conference operator today. I would like to welcome everyone to the Adentra second quarter 2024 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during this time, simply press the star followed by the number one on your telephone keypad. To withdraw your question, please press the star followed by the number two. With me on the call are Rob Brown, Adentra's President and CEO, and Faiz Karmali, Vice President and CFO. Adentra's Q1 2024 earnings release, financial statements, MD&A, and other quarterly filings are available on the Investors section of our website at www.adentragroup.com. These statements have also been filed on Adentra's profile on Cedar Plus at www.adentragroup.com. cedarplus.ca. I want to remind listeners that management's comments during this call may include forward-looking statements. These statements involve various known 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 a dentist'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.S. dollars unless stated otherwise. I would now like to turn the call over to Rob Brown. Please go ahead.

Nice job. Thanks, Ludi. Good morning, everyone. Thanks for joining us today as we report Edentra's financial and operating results for the second quarter of 2024. I'll start with our key business and financial highlights for the quarter. Fez Carmeli, our CFO, will then provide details of our Q2 financial results. I'll then finish off our prepared remarks with our outlook for 2024. As Ludi noted, I'll remind those listening, all dollar figures discussed today are in U.S. dollars and less otherwise noted. This past quarter was eventful for Edentra, characterized by by a number of significant and positive developments. First, after 11 years of dedicated service, Mr. Peter Bowles stepped down from the Dentures Board of Directors in May and reduced his share position to just under 10% to fulfill personal, financial, and estate planning goals. We anticipate that this change will enhance the company's market float and trading liquidity over time, benefiting all shareholders. We would like to thank Peter for his years of service to the company and his continuing support as a shareholder of the Tentra. Second, we successfully completed a $73 million equity offering in June. This initiative reinforced our balance sheet and positioned us to pursue acquisition targets in our promising M&A pipeline. Third, we were pleased to announce the $130 million of Wolf Distributing in July. Wolf is an excellent strategic fit as it enhances our geographic footprint and product range by adding complimentary millwork locations to our U.S. Midwest operations. It also introduces new branded specialty products in the outdoor living category and strengthens our access to the ProDealer customer channel. I'm excited to welcome Wolf and its employees to the indenture team. I'm also pleased that we deployed some of the capital from our equity raise in June expeditiously and towards an acquisition that is expected to be immediately accretive to both adjusted earnings per share and adjusted EBITDA margin. The addition of Wolf advances us towards our destination 2028 goals, which include achieving 3.5 billion in annual run rate sales through a blend of organic and acquisition-driven growth. Fourth, on Wednesday of this week, the U.S. Department of Commerce announced the preliminary results of a further administrative review with respect to certain hardwood plywood products produced in Vietnam that were alleged to be circumventing a previously established anti-dumping and countervailing duty order against hardwood plywood from China. Based on the preliminary results of this administrative review, we believe we may be eligible for a refund on a significant portion of the 25.7 million in duties that have been paid related to this matter. While the U.S. Department of Commerce's results are provisional and could change upon becoming final, we view this as a very encouraging development. And finally, the events in the quarter included solid financial and operating performance. we continued to strengthen our bottom line results with second quarter sales of $549.5 million, adjusted EBITDA of $48.5 million, and adjusted earnings per share of $1.06. While sales declined 6.2% compared to the same period last year, primarily due to product price deflation, our gross margin percentage increased by 130 basis points year over year, 21.7%. This is the 13th consecutive quarter of gross margin above 20%, which has been achieved through several strategic initiatives, including the addition of higher gross margin mixed businesses in the acquisitions of Novo and Mid-Am, a focus on higher margin ready to install products, positive contributions from our global sourcing program, and efforts to leverage data analytics and our digital platforms so that we can better manage our assets and maintain strong discipline on our product pricing. Despite softer pricing and what was a more muted spring seasonal activity in North American construction markets, our increased gross profit margin combined with tight cost control resulted in strong bottom line results with adjusted EBITDA increasing 5.1% and adjusted basic earnings per share growing 43.2% compared to the same period last year. During the quarter, we generated strong cashflow with 79% of our adjusted EBITDA converting into operating cashflow before changes in working capital. This was supported by our solid operating performance as well as strategic efforts to reduce interest expenses via a combination of debt reduction and interest rate swap and a reduction in cash taxes paid. We ended the quarter with a leverage ratio of 2.2 times, which is at the lower end of our two to three times range, and that positioned us to close on the Wolf transaction. We also declared a quarterly dividend of 14 cents per share, payable to shareholders on October 15, 2024. I'll now pass the call to Fez to provide details of our Q2 financial results, and then I'll return to talk about our outlook before we open the call to questions.

Thanks, Rob, and good morning, everyone. I'm going to recap our financial results for the second quarter of 2024 and outline our financial position at quarter end. Again, I'll remind those listening that any dollar figures Rob and I use today are in US dollars unless we've stated otherwise. Starting with consolidated revenue, we generated sales of $549.5 million in Q2. This decrease of $36.4 million or 6.2% from sales levels in Q2 of 2023 was due primarily to product price deflation as well as a 1% decline in year-over-year volumes. On a regional basis, sales in our US operations were $504.6 million, or 6.7% less than Q2 2023. This was driven by a 6% decrease in product prices and a slight decline in volumes. Our Canadian operations posted Q2 2024 sales of Canadian $61.4 million which was 1.7% higher than Q2 sales in 2023. Canada experienced a 7% increase in volumes during the quarter, partially offset by a 5% decrease in product prices. Moving now to gross profit, we earned 119.2 million in the second quarter, essentially flat versus Q2 2023. Lower sales were offset by a 130 basis point increase in gross margin to 21.7%, reflecting the positive impact of the strategic initiatives Rob discussed in his opening remarks, together with a reduction in inventory write-downs as compared to the same period last year. Our operating expenses in Q2 were 92.2 million, a 2.3% decrease compared to Q2 of 2023, with lower premise and administrative costs more than making up for inflationary cost pressures. Looking now at our adjusted EBITDA for Q2 2024, it was $48.5 million, or a 5.1% improvement over the second quarter of 2023. The main drivers of the adjusted EBITDA improvement were the increase in gross margin of 130 basis points and a $2.5 million reduction in operating expenses before changes in depreciation, amortization, and office expense. And finally, adjusted net income in the first quarter was $24.4 million, an increase of 47.3% over Q2 2023. The change was primarily driven by the growth in adjusted EBITDA, a $1.7 million decrease in finance expenses, and a $4 million decrease in income tax expense. On a per share basis, adjusted basic profit per share was $1.06, which was a 43.2% increase over the $0.74 we reported in Q2 of last year. Looking at our cash flow position for the first quarter, we generated 26.8 million of cash flows from operating activities as compared to 52.8 million in the Q2 period in 2023. The year-over-year decrease was the result of Q2 working capital investments of 10.7 million compared with a 28.1 million cash inflow from the release of working capital in Q2 of 2023 a period during which we were actively reducing our inventory levels. The investment in working capital is normal for this time of year. Moving next to our balance sheet, our cash flow generation in Q2 was primarily used to fund our investments in working capital, and combined with the $73 million equity issue resulted in a decline in our net bank debt at the end of the quarter to $329.8 million. we exited the quarter in a solid financial position with a leverage ratio of 2.2 times and unused borrowing capacity of $485 million, which gave us ample balance sheet capacity to fund the $130 million Wolf transaction after quarter end and still retain flexibility we need to advance our business strategies while managing any short-term headwinds. The capital allocation priorities are the continued responsible management of our balance sheet finding our growth both through acquisitions as well as organically, and providing incremental total returns to shareholders through dividends. With that, I will hand the call back over to Rob.