ADENTRA Inc.

Morning, my name is Marissa and I will be your conference operator today. I would like to welcome everyone to the Adentra first quarter 2025 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 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, Adantra's President and CEO, and Seth Carmely, Vice President and CFO. Adantra's Q1 2025 earnings release, financial statements, MD&A, and other quarterly filings are available on the Investors section of our website at www.adantragroup.com. These statements have also been filed on the DENTRA's profile on CEDAR Plus at www.cedarplus.ca. 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 a dentist's earnings tax 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 otherwise stated. I would now like to turn the call over to Rob Brown.

Good morning, everyone, and thank you for joining us today.

In the first quarter of 2025, 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 U.S. mortgage rates and growing macro uncertainty, especially around the volatile U.S. trade environment. Total sales were up modestly, supported by the contribution from Wolf Distributing. On the organic side, sales were down by 4%, primarily 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. 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 million in adjusted EBITDA with a 7.4% margin and adjusted EPS of 42 cents, 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.

We expect that to decrease as inventory is sold through the balance of the year. I now want to 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 232 investigation to determine the effects on U.S. 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 232 tariffs are imposed. 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 U.S. supply solution versus an offshore one. With that, I'll turn the call over to Fez Karmali, who will take you through the financials in more detail. Fez?

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

In the U.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. To continue to manage costs effectively, total operating expenses increased 6.5%, driven primarily by the addition of work. However, on an organic basis, expenses were up just 1% year over year. This is less than the rate of inflation and highlights our ongoing focus on platform efficiency and cost discipline. Adjusted EBITDA was 40 million compared to 45.6 million in Q1 last year, resulting in a 7.4% adjusted EBITDA margin. Adjusted EPS came in at 42 cents, down from 76 cents 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 amid the potential for trade disruptions. 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 forma either step, which ended this quarter at three times. Importantly, we had over $360 million in available liquidity at quarter end, providing ample flexibility to navigate the current environment. We expect the 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 return $4.5 million to shareholders through dividends and buybacks. On May 6th, the board approved a quarterly dividend of 15 cents per share, continuing our strong track record of shareholder returns. To the end of April, we had repurchased approximately 250,000 shares under our NCID, 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? Thanks, Jez.

Macroeconomic headwinds continue to impact our end markets, notably elevated U.S. 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. We remain confident in the long-term fundamentals. Structural underbuilding, favorable demographics, and aging housing stock continue to support demand. As one of the largest two-step distributors in a fragmented $43 billion 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. 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&A deployment of $50 to $150 million, gross margin above 20%,

adjusted EBITDA margin of 8% to 10%, and a return on invested capital of 10% to 12%.

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?

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 touchtone 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 two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment while we compile your questions. Your first question comes from Nikolai Gorupich with CIDC Capital Markets. Please go ahead.

Hi, good morning, everyone. Over the past few weeks, a lot of the home builders 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

had your organic growth expectations changed at all?

Hey, good morning, Nikolai. Yeah, we've seen obviously the same reporting. We follow the large home builders as they issue. So we would agree with the comment. Everybody has seemed to walk back expectations, I think, with the greater uncertainty, which I highlighted in my opening comments. In terms of a slower spring selling season. I mean, we're into the start of 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 home builders 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. You know, no other additional kind of comment or observation to offer at this point relative to our activity levels, but we're well aware.

Okay, I see. And on a similar note, some of the home builders also emphasize 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. I would say, as 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.

Okay, thank you. That's all I had. I'll turn it over. Thanks, Nicola.

Okay, your next question comes from Yuri Zareda 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 crop in our gains and to whether expectations are tied in fact to our part of that?

Yeah, so I appreciate the question, Yuri. The move away from the destination 2028 targets I think is just prudent and reflects today's macro environment that's just more dynamic, and I think there's a little a bit more in terms of question marks what at least the short to mid-term 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. For the most part, it's quite similar. For the Destination 2028, 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 as a changed macro backdrop.

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

Yeah, 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 That is a business that has some seasonality to it because it has a more significant component of decking within its product mix. So you're going to see some differences quarter to quarter in terms of their revenue contribution. I would also note that This year, 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.

Okay, thank you. That hope allows me to embark with you.

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

Morning, everyone. Congrats on the quarter. Hi, Zach. So I understand the rationale behind prepositioning the inventory. That makes sense. With the larger than typical build, do you think the potential for multiple pullbacks with what we're hearing from homebuilders How confident are you in being able to unwind that inventory position?

Very. I mean, 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 issues. incrementally in the 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. 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, ACE views. So we feel very confident we'll be able to move through that as we move forward.

Good call, I think. And then we've touched on the home builders. Maybe you could tell us what else you're hearing from other large channel partners, maybe on the retailer side.

Yeah, so... I think nothing that would conflict with what the home builders 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 pro 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. And also as we look at what the large home builders are doing, the degree to which they're going to continue to participate in mortgage buy-downs. So those are all factors that we're hearing from our pro customers.

Perfect. Thank you. I'll turn it over.

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

Morning, everyone. Hey, Ian.

Good morning.

As it pertains to the financial KPIs, and obviously this year has been a bit more challenging, but it was good to see that the 10% EBITDA target is still in there. If there was an uptick in activity or a substantial uptick in activity as we come out of this draw, could you get to that target with the existing business, or is it predicated on additional M&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 through the P&L. 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. Would you concur with that viewpoint?

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

Yeah. And then the last thing from my perspective is, you know, I fully acknowledge it's challenging to execute M&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 come 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. 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 Fez'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 pens 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. 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 smaller peers that may be more regional in nature?

Yeah, 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 the in times of market disruption where we're going to have more options and we're going to have, if 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, and in times of upheaval, that sometimes shines through even more strongly.

Understood. Thanks very much. I'll turn it back over. Thank you.

Your next question comes from Frederick Tremblay with Desjardins. Please go ahead.

Thank you. Good morning. Good morning. So let me start maybe on the organic growth trends.

Yeah, I 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 imply that March was quite a bit better than January and February from that perspective.

I was wondering if there's anything that you can point out to explain that improvement and if that's something that we can really extrapolate into Q2 as well?

Hi, Frederick. It's Fez here. I can answer that question. You're right. March was a better month. If you think of the sequential trend, January was the softest. Talked about why that was in our disclosures. As with many others, there was some significant weather impacts, particularly in January. February was a little better and March was a little better still. These were to clarify from a volumes perspective. Pricing even sequentially through the quarter was relatively flat. So we did see some pickup in activity through the first quarter. I would, and as you see with our cautious tone here, I would be careful about taking March and extrapolating that forward. As Rob mentioned, it's been a little steady into Q2, which is good. But, you know, is April indicative of the next several months? I think in this environment, it's maybe prudent to take a bit of a cautious approach on that. There was an earlier question about, you know, sort of the spring selling season and which Rob mentioned, and some of the leading indicators we look at would suggest that 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 math you've done there, but your comment around should be assumed that April onwards will also be as strong as March. I would maybe just caution that as well.

Perfect. I appreciate that. Last question on pricing. Nice to see inflation finally coming to an end in Q1. Is that something that you feel is sustainable? Or I guess on the opposite front, can we maybe see some inflation as we get to 2025 with the tariffs and other inflationary pressures potentially?

We could, absolutely. I think the key point here will be that Section 232 investigation and what comes from that, that needs to be concluded by December, which is 270 days after it was initiated. 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 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. But all things equal, we are happy that we've seen price stability here for a number of months. And we're betting that 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&L.

Understood. Thanks for taking the questions. You bet.

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.

Hi, morning team. Thanks for taking my questions.

Rob, I just want to circle back and make sure I heard correctly. On the April trends, you said they were stable.

I'm not sure if that was exactly what you used, but I think if it was, was that stable quarter on quarter or month on month or year on year?

Hey, 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 April.

And is it too early to have any commentary on what you're seeing for the first week of May? I would say it's too early. Okay, fair enough. And then on the question about pricing, you know, and potentially being passed through, and Rob, you did touch on this on kind of the offset being

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?

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. Price appreciation goes a long way, particularly after a period of significant price deflation we've had in the last couple of years.

Okay, that's good, Collin. And maybe one more from 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 a dry tire to spend on homes.

That's an interesting one. 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 means and can't turn spending back on once they become a little bit more confident. Okay, thanks for the color.

Thank you.

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

Okay. Thanks for hosting us today. It was a nice job. And thanks, everybody, for calling in and showing interest in the denture. We're available for further questions. Please reach out to Pez and myself if we can assist.

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