ADENTRA Inc.

Good morning. My name is Chloe, and I will be your conference operator today. I would like to welcome everyone to the Adantra fourth 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 the 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 two. With me on the call are Rob Brown, Adentra's President and CEO, and Faz Karmeli, Vice President and CFO. Adentra's Q4 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 Feeder Plus at www.adentragroup.com. 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 be different materially from those described in these forward-looking statements. Please refer to the text in the dentist's earnings press release and financial filings for a discussion of the risk 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.

Good morning, everyone, and thank you for joining us today. I'll start the call by touching on some key highlights for the 2024 year. Fez Carmeli, our CFO, will then provide some highlights of our fourth quarter performance. I will then conclude our call with some comments around current trends and outlook for 2025. Please note that all figures mentioned today are in U.S. dollars unless otherwise indicated. One of the enduring truths of the commercial landscape is its dynamic nature. fluctuating between periods of expansion and periods of adversity. In my 20 years with Adentra, one of our top priorities has been to smooth the impact of those hills and valleys by building a larger, more diversified, and resilient business so that we can navigate these changes with stability. Through thoughtful execution and strategic growth, we've positioned Adentra to weather market fluctuation, while continuing to deliver strong financial and operational performance. In 2024, we did just that, achieving stable financial results despite challenging macroeconomic conditions in our industry. We faced price pressures across several product categories, persistently high mortgage rates, and weakened demand in the building market. Despite these headwinds, we held sales volumes steady improved our gross margin percentage by 90 basis points to 21.7%, and maintained tight control over operating expenses, allowing us to deliver adjusted EBITDA and adjusted net income in line with last year's performance. Additionally, our strong cash flow generation of 142.8 million, combined with our credit facilities and an equity raise, allowed us to complete our $130 million acquisition of Wolf Distributing, while also strengthening our balance sheet and lowering our leverage 2.4 times. These results demonstrate our ability to execute on our business strategy. Taking a step back, over the past five years, we've more than doubled our pro forma annual sales to nearly $2.2 billion, while delivering an impressive 13 percent compound annual growth rate in adjusted earnings per share. We've generated almost 600 million in total operating cash flow during this time, enabling us to invest in our business, expand through acquisitions, reduce leverage, and return capital to shareholders, including annual dividend increases for 12 consecutive years. These results demonstrate our ability to execute on our growth strategy, particularly in M&A, a key strength of Edentra. Over the past 15 years, we've completed 16 acquisitions, adding $1.7 billion in sales, including Wolf Distributing in July 2024. Wolf has been a highly strategic addition, expanding our geographic presence in the U.S. Midwest strengthening our position in the pro-dealer channel, and broadening our outdoor living portfolio, including a key supplier relationship with ASEC, a global leader in premium decking and railing. Wolf aligned seamlessly with our strategy, enhancing our diversification across geographies, end markets, and products, while moving Adentra further up the value chain. Like our past acquisitions, it was accretive to adjusted EPS from day one, bringing us closer to our destination 2028 goal of 1.3 billion in new sales with 800 million targeted through acquisitions. On a full year basis, we expect Wolf to contribute approximately 165 million in pro forma sales, further strengthening our competitive position. As one of North America's largest distributors of architectural building products, we're well positioned to leverage our scale to drive growth, stability, and long-term success in a market characterized by smaller regional players. A key differentiator is our digital engagement strategy, enabling us to serve a diverse customer market from global DIY retailers managing thousands of SKUs to small, no-work businesses needing just-in-time deliveries. Yet, our true strength lies in our people. Their deep expertise, combined with advanced digital tools, ensures exceptional service. Through Edenture University, we trained over 800 employees in 2024, reinforcing our commitment to excellence. This synergy of talent and technology has built a loyal customer base of 60,000 plus and strong partnerships with leading manufacturers, many through exclusive agreements. Combined with our proprietary global sourcing program, these relationships further strengthen our market leadership. In conclusion, I'm pleased with the progress we made in 2024, demonstrating our ability to navigate a challenging market while advancing our growth strategy and strengthening our financial position. As we continue executing on our strategic priorities, we remain focused on disciplined capital allocation, operational efficiency, and delivering value to our shareholders. Now I'll turn it over to Fez to walk through our fourth quarter financial results in detail. Fez, over to you.

Thanks, Rob, and good morning, everyone. Please note that all figures are in U.S. dollars. For the quarter ended December 31st, total sales rose by $16 million to $530.8 million, primarily driven by our acquisition of Wolf, which contributed $34.3 million. This helped offset the $17.3 million, or 3.4%, decline in organic sales, reflecting an approximate 1% decrease in product prices and a 2% decrease in volumes. In the U.S., sales grew by $13.9 million to $489.9 million, driven by Wolf's contribution, partially offset by a 4.3% decline in organic sales. The organic decrease in the US was attributable to an approximate 1% decrease in product prices and a 3% decrease in volumes. In Canada, sales increased by Canadian $4.1 million to Canadian $57.1 million, supported by a temperate 0.8% volume increase, partially offset by a 3% price decrease. Gross profit for the quarter was $115.2 million, up 3.9 million, or 3.5%, from Q4 2023, with a margin of 21.7%, reflecting the positive impact of our strategic initiatives and operating efficiency. Operating expenses were increased to 94.4 million, an 8.3 million, or 9.7% increase, with 4.5 million of this related to the addition of wolf $2.5 million due to higher people costs tied to inflationary adjustments and employee benefits, and the rest from a one-time insurance accrual reversal in the fourth quarter of the previous year. Adjusted EBITDA for the quarter was $42.2 million, down 5.1% from $44.5 million in Q4 2023. primarily due to increased operating expenses, which were partly offset by higher gross profit. Our cash flow performance highlights the strength of our business model. In Q4, we converted 42.2 million in adjusted EBITDA into 34.9 million of operating cash flow, an 82% conversion rate. Additionally, Working capital reductions generated another $6.1 million. We closed the quarter with a pro forma leverage ratio of 2.4 times and over $400 million in availability on a revolving credit facility. Our capital priorities remain prudent balance sheet management, growth through acquisitions and organic investments, and shareholder returns through dividends. Overall, our results reflect strong progress against our strategic priorities with recent acquisitions and disciplined cost management helping us to offset soft market conditions experienced during Q4. With that, I'll turn it back to Rob. Rob?

Thanks very much, Fez. As we move through the first quarter of 2025, we faced some headwinds. with organic sales down 6 percent year over year in the first two months, primarily due to lower volumes. Unfavorable winter weather impacted sales days in January, as did broader market challenges, including elevated U.S. mortgage rates and constrained housing supply, which are contributing to affordability issues. Additionally, the onset of a trade war between the U.S. and its key trading partners has increased the prospect of renewed inflationary pressure and continued economic headwinds, adding to near-term uncertainty. That said, Edentra is well-positioned to manage these challenges. With 90% of our operations in the U.S. and an estimated 92% of our purchases not anticipated to be directly impacted by tariffs declared in March or those expected to come into effect in April, our direct exposure is limited. And should inflationary pressures return, our pricing pass-through model allows us to respond to market fluctuations within a reasonable timeframe. While the near-term economic outlook may be uncertain, long-term housing fundamentals remain strong. Historic under supply, favorable demographics, and aging housing stock continue to support demand. Pricing trends have also begun to stabilize following declines in 2024, and we remain focused on operational efficiency, cost control, global sourcing, and high value product offerings. The power of Edentra's platform differentiates us from the smaller regional players in our industry. Our business is significantly diversified by geography, product type, customer channel, and end market. We leverage our diverse platform in multiple areas, including digital engagement with our customers, proprietary global sourcing programs, and investments in our people. With a solid balance sheet, and a disciplined strategy, Edentra is well-equipped to navigate near-term volatility while continuing to drive long-term growth and create value for our shareholders. That concludes our prepared remarks. So at this time, I'll turn the call over to the operator to open up the lines for Q&A. Operator?

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star key followed by one on your touchtone phone. You will hear a one-tone prompt acknowledging your request. Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press the pound key. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment, please. Our first question comes from the line of Yuri Zereda from Canaccord, January 3. Your line is open. Good morning.

Thank you for taking my questions. Good morning. Could you talk about how the conversations with clients have evolved in the last couple of months in terms of expectations for demand growth in 2025, and specifically, on how you're thinking about it throughout the year vis-a-vis the soft Q1 you pointed to.

Sure. I would say that the conversations with our customers have been steady and reasonable with some caution intermixed just based on what's going on within the economy and some trade policies that are still very much in motion. We do take a look at what our key supply chain partners are saying as well. And there are some very large partners in people like BFS and Lowe's and Owens Corning that we follow. And when we kind of triangulate that along with the micro view of discussions with our customers, There seems to be really a consensus around it's a plus or minus flat year for the coming year, whether you're talking about single family or repair and remodel, multifamily probably a little bit weaker just because it was coming off some historic highs. So that's kind of where we're at in our conversations today. Yuri, you saw we put out just kind of the factual where we are through the first two quarters of 2025 as well to kind of bring that into greater resolution.

That's helpful, Connor. Thank you. And then regarding the types Disclosure. Is there any more color you could share in terms of their expected impact on your financials and or on the measures you're taking to handle them?

Yeah, we're actually reasonably encouraged around tariffs. You saw the disclosure that we reckon about 8% of our current purchasing is impacted by tariffs that have been announced so far. That's going to be a bit of a liquid situation. I think the comments we would make are we source from over 30 countries around the world. We provide solutions to our customers in terms of imported products to supplement also the domestic alternatives that we have. So to the extent that we've got tariffs that come in, we've got some flexibility to move supply chain around between countries as warranted. We also, you know, the majority of what we're selling is domestic product. We can work more closely with additional volumes from domestic customers as well. So while we acknowledge there's some uncertainty to all this, we think we're as well positioned as anybody in our industry to move our, you know, our purchase order book around and make sure we keep our customers in product.

Okay. Thank you. That's helpful. I'll jump back in the queue.

Our next question comes from the line of Nikolai Garupich from CIBC. Your line is open.

Hi, good morning. Just wondering what you've seen on the pricing side in Q1 and what do you expect for the full year?

Q1 has been... Good morning, by the way, Nikolai. Q1 has been pretty stable. We haven't seen... much of a change there across broad product categories we participate in. And you saw through 2024 that the product price deflation that we had really decelerated through the year, kind of going from a 9% in the first quarter of 2024, fell to a 6% in Q2, a 3% in Q3, and roughly flat in Q4. And we're in about the same place now. So That kind of bottom balancing is good in terms of your second part of your question, what does the balance of the year look like? If anything, I think we would have an expectation of some product price inflation just given the tariff environment that we're currently in.

I see, I see. Thanks. And how's the M&A pipeline looking? Has there been any changes in the vendor expectations and the multiples you're seeing there?

No, we're actually continuing to feel very good about our M&A pipeline, and it's more than a pipeline. These are very well-developed relationships, contacts, and discussions. You noted in the Q4 that we've brought our leverage down below the mid-twos. We've got $400 million of leverage. untapped uh availability on our balance sheet so we actually feel like we're well positioned to continue to execute on uh the acquisitions piece and that's an important part of our destination 2028 plan um we were pleased with what we got done in 2024 with wolf uh and we we think there's going to be more activity achieved in 2025 as as well i wouldn't say there's any big sentiment shift in seller expectation, just to directly answer your question. We're in kind of an unnormalized discussion environment. The only thing that's a little bit different is ensuring when you're talking to targets that you understand how tariffs might impact their product mix going forward.

Great. Thanks. That's all I had. I'll turn it over.

Thank you.

Our next question comes from the line of Zachary Evershed from National Bank Financial. Your line is open.

Good morning, everyone. Thanks for taking my questions.

Hey, Zach. Hey, good morning.

So if we ignore the weather impact in January, what was the pace of sales like in February?

Yeah, so a couple of comments there. january february number that we gave you uh if we were to try to peel out how much of that is weather i would say probably a quarter of that decline is is weather so you can kind of dial that back as uh episodic um in terms of maybe sequential trends i mean if you look at q4 um october and november were actually pretty good. December's where things slowed. Our January was, as you would expect, stronger than December. Our February was stronger than January. So as we're moving through the quarter, there's signs of life there for sure. And most of the weather impacts we would say were

That's helpful. Thanks. And then with the new COO appointment, could you speak to what that signals and whether Drew's responsibilities will be expanding?

Yes. So the new COO is new in terms of role to the company, not new to the company. Drew's a 35-year veteran of our industry, and we've worked together since 2016 when we acquired Rugby. This is his third promotion since that time. Most recently, he was running our industrial business in the United States, and now that's been expanded to include our home and pro channels, so accountability for that as well. There's no big signal here except to say the company's reached a size and scale where we need it. an individual oversighting full-time the operational excellence and efficiency of the company. Prior to that, I had a number, multiple direct reports on the operating side, and now that's channeled through Drew. I will assure you we all still work very closely together in a very flat and unbureaucratic organization to execute on the strategy. Gotcha. Thanks.

If we flip over to the relationship with some of the major retailers, we did note some disintermediation by Lowe's of another distributor that went direct to suppliers. Is that at all a concern of yours?

No, not particularly. From time to time, you will have larger home center customers look at going direct on some product lines. We're providing a tremendously broad mix to those customers. And this really is a worldwide sourcing, warehousing, logistics solution that we are providing to them. So, no, I mean, I've been in the business a long time and Whenever the disintermediation kind of question comes up, we've never experienced that in practical terms.

That's helpful. Thanks. We'll turn it over. Thanks, Zach.

Our next question comes from the line of Ian Gillies from Stifel. Your line is open.

Good morning, guys.

Hi, Ian. Good morning.

Is there any increased tension with your customers right now about how much margin you're capturing just given that growth's harder to come by?

No. I would say the margin that you've seen in our business has been a function of a build through strategy, product mix, worldwide supply chains, our acquisitions strategy. We perform a very valuable service for our customer and we deserve to be paid for it. It's quite reasonable in our view where the relative distribution of the margin is in the supply chain. Nothing that I would point to there yet.

That's helpful. To me, the valuation on your stock would suggest it's probably as good a buy as anything you could go buy in the M&A market. Has there been any thought to using an NCIB again, especially given that you may get some release in working capital here over the next six months?

Yes, that's always a tool that we have. I think you'll know in December we renewed the NCIB, so that's available to us. We're obviously coming through a blackout period as a company. But yes, it's not lost on us where we're currently trading. And we think it's an outstanding investment. We generally try to take a balanced approach to capital allocation because we have such a good corporate opportunity around M&A. But I think that there can be a balance there, particularly when there's such a dislocation in the stock prices you're pointing to right now.

Understood. That's helpful. I'll turn the call back over. Thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press star followed by one. As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys. Our next question comes from the line of Jonathan Goldman from Scotiabank. Your line is open.

Morning, guys. Thanks for taking my questions.

Hi, Jonathan.

Good morning. Rob, you talked about broad industry expectations for like a flattish year in single family and R&R in 2025. But in terms of end market demand and specifically on the consumer, do you have a sense if things have stayed the same or actually gotten worse since the start of the year?

Yeah, my answer to that would be probably more of a sentiment answer. I think that with the rapid movement in in policy and you know just the general question what does it mean that comes at us most days uh i think that does start to wear somewhat on the consumer and cause you to uh squeeze your wallet a little tight tighter till you until you know what's what's going on i mean when you look at our customers activities and you know the things that we're doing i there's nothing i would point point out there that we haven't already talked about but I think if we can get a more stable policy environment sooner that just helps with people planning their own expenditures from a consumer's perspective.

Interesting and then a second one here given the depressed valuations across the building product space do you think we can see an acceleration of consolidation in the industry?

Yeah, I mean, it's a very interesting question. It's one that we spend time talking about and considering. You know, I think it's kind of a wait and see as we roll through 2025. We've got obviously one major potential M&A deal cooking along in the roofing space. There may be other moves. We talked to all the major investment bankers, as you would expect, and they would echo that there may be more coming. But I think we just need to wait and see.

Interesting color. Thanks, guys. I'll get back in queue. Okay.

There are no questions at this time. Mr. Brown, please go ahead.

Okay, we'll conclude the call. Then, Chloe, nice job today, and I appreciate everybody dialing in and your good questions. If you've got any follow-ons, please do reach out to Fez and myself. We'd be happy to chat about our business.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect.