ADENTRA Inc.

Good morning, my name is Joanna and I will be your conference operator today. I would like to welcome everyone to the ADEMTRA third 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, Adentra's President and CEO, and Fez Kamali, Vice President and CFO. Adentra's third quarter 2025 earnings release, financial statements, MTNA, and other quarterly filings are available on the investor section of our website at www.adentragroup.com. These statements have also been filed on Adentra's profile on CDAR Plus at www.cdarplus.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 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.S. dollars unless stated otherwise. I would now like to turn the call over to Rob Brown. Please go ahead.

Thanks, and good morning, everyone. We delivered strong results in the third quarter, highlighting the resilience and consistency of the Dentures operating model. We grew sales, adjusted EBITDA, and maintained strong earnings despite a continued soft residential construction market and an uncertain macro backdrop. For the quarter, we generated sales of $592 million, up 4% year over year, adjusted EBITDA of $49.9 million, and adjusted EPS of $0.70. Organic sales grew 1.7% as product prices continued to firm throughout the year. Given our price pass-through model, these pricing gains supported gross profit growth even in a stable volume environment. Wolf Distributing, which we acquired in mid-2024, also contributed to our top-line performance. Gross margin came in at 21.4%, up slightly from last year, reflecting continued discipline in pricing and procurement. Operating expenses rose by 5%, driven by inflationary pressures on premises and wages, as well as mark-to-market LTIP adjustments related to share price gains. Earnings per share were 42 cents, consistent with last year's Q3 result. We also continued to convert earnings into cash, generating 60.6 million of operating cash flow in the quarter. That includes $35 million from operating cash flow before changes in working capital and an additional $25 million from working capital release as we executed our plan to reduce inventory ahead of the seasonally slower fourth quarter. We returned $7.4 million to shareholders during the quarter through dividends and buybacks under our normal course issuer bid. Since launching the program in March, we've repurchased more than 740,000 shares. We're about 3% of the outstanding shares at an average price of Canadian $29 per share. Our leverage ratio is 2.7 times down from the seasonal peak in Q2. We expect it to be closer to the mid twos by the end of the year. That positions us well for capital deployment on potential M&A activity in 2026. On the strategic front, over the last five years, we've acquired companies representing 1.1 billion in acquired revenue. These companies have significantly diversified our product offering and expanded our exposure to higher margin specialty categories. The integration of Wolf, which was acquired in July 2024, continues to perform on plan, broadening our Midwest presence and enhancing access to the ProDealer channel. From a trade perspective, our product mix remains well-balanced. Roughly 30% of our products are subject to country-specific tariffs at average rates around 20%. Importantly, the recent U.S. Section 232 review of wood products largely excluded our product categories. We continue to manage tariff exposure through our price pass-through model and diversified global sourcing network spanning 30 plus countries. providing us with diverse product options and different price points for our customers. If tariffs increase product costs, we adjust pricing accordingly to hold gross margin percentage. In addition, our cost-conscious management approach remains a key competitive advantage. We're focused on asset efficiency and continuous improvement in returns on capital deployed. This discipline, combined with a scalable operating model, positions us to benefit from operating leverage as volumes recover. With that, I'll turn it over to Fez to walk through the financials in more detail.

Thanks, Rob, and good morning, everyone. As Rob noted, third quarter results demonstrate stable performance across our business. Let me take you through the numbers. Sales were $592.1 million. up 4.1% from the prior year. That includes a 2.4% contribution from Wolf and 1.7% organic growth, driven mainly by product price appreciation. In the U.S., sales rose 4.4% to $548 million, with Wolf accounting for roughly 2.6 points of growth and organic sales, adding 1.8 points. In Canada, sales in Canadian dollars were up 1.2%, reflecting higher prices offset by slightly lower volumes. Gross margin increased 4% to 126 million, with margin rate up slightly to 21.4%. That reflects effective pricing discipline and procurement execution across our operations. Operating expenses were 101.6 million, of 5% year-over-year. The increase was driven by higher premise costs, wage inflation, and a $1.4 million mark-to-market adjustment on long-term incentives. Importantly, we continue to invest selectively in our people and infrastructure to support sustainable growth while maintaining strong cost discipline. Adjusted EBITDA was $49.9 million up 3.9% from last year. Adjusted EBITDA margin was 8.4%, consistent with the prior year and in line with our target range at this point in the cycle. Net income was 10.1 million, or 42 cents per share, broadly in line with Q3 2024. On an adjusted basis, net income was 17.2 million, and adjusted EPS was $0.70 compared to $0.74 a year ago. Operating cash flow was $60.6 million compared to $67.7 million in Q3 last year. The slight decline reflects timing differences in tax payments and working capital. Year-to-date cash flow from operations totaled $61 million. Leverage stood at 2.7 times net debt to EBITDA at quarter end. we remain comfortable with our balance sheet position and expect further deleveraging through the end of the year. Lastly, the board approved an increase in our annual dividend to Canadian 64 cents per share, reflecting confidence in our stable cash generation and long-term outlook. With that, I'll turn the call back to Rob for his closing remarks before the Q&A. Rob?

Thanks, Fez. As we look ahead, the fourth quarter is typically a seasonally slower period for construction activity, and we expect adjusted EBITDA to be broadly in line with our first quarter performance. Affordability remains a challenge for U.S. homebuyers, given mortgage rates and limited housing supply, and trade tensions continue to add macro uncertainty. That said, our long-term view on the residential construction market is unchanged. Structural undersupply, favorable demographics, and an aging housing stock all point to sustained demand over time. We will continue to execute within our full cycle value creation framework Focusing on operating efficiency, organic growth initiatives, and disciplined execution of our market consolidation strategy, we see ample opportunity to deliver double-digit returns and accretive growth for the long term through continued operational excellence, prudent capital allocation, and selective acquisitions in our large and fragmented markets. We have a lean, scalable distribution platform with inherent operating leverage and a management team focused on continuous improvement, growth, and returns on capital. With that, we'll open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the 2. And if you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Kyle McPhee of Cormark. Please go ahead.

Hi, everyone. Good update. Thanks for your commentary on quantifying the updated tariff rate exposure. Now, correct me if I'm wrong, but the updated and higher tariff cost exposure, that'll trigger corresponding pricing gains on your revenue line on a near-immediate basis, and we'll see that in the upcoming results. And second part to this, you know, to the extent you're taking price and there's no demand response versus demand realities that, you know, prevailed prior to this tariff change, this could actually benefit your profit expectations. Is that playing out right now, or is it fair to say your organic volume expectations are directionally eroding as you and the sector take price up?

Hey, good morning, Kyle. I think we need to see a little bit how it plays out. It's tempting math to say 30% of your mix is going up by 20% tariffs because we're price pass-through. That is true, the price pass-through piece. But the playing it out piece, I think we have to wait and see what happens in terms of competitors. have all added inventory in advance of tariffs. So I think there's going to be some moving down in terms of inventory in the market, which may take some time, which I think is going to keep prices more orderly. I would also say that there is the possibility of suppliers taking some of the costs, and then there's always the possibility of You know, what we do, we carry a good, better, best. So there may be some rotation as between price points between the highest and the lowest price offering in the mix. So I think all that, you know, we just need to give a little bit of time. I would say... that yes, we will be pricing with new tariffs in mind and passing that through to maintain our margin. And tariffs are adding cost to the products that we're sourcing. So I think there's definitely upward movement, but the scale and the timing of that, I think we just need to have a bit of a wait and see.

Okay. Thank you for that commentary. And then In Q3, your organic volume performance was pretty good in the context of the demand environment and in the context of what peers in the sector have been reporting. You know, is there anything company-specific you can point us to to help explain your relatively strong performance? I suspect it's a variety of things, but curious what you think is worth highlighting and how sustainable this sector at performance is for Edentra.

Yeah, as always, it's... Typically never one thing, but we are pleased with how we've performed in a relatively muted macro environment. I think that the team has executed very well. We continue to get better at pricing and our use of technology, the sophistication of our supply chain, including global sources, giving lots of different options to our customers. All those things contribute to how we perform in terms of share in the market. So it's always difficult to put your finger on market share information, but I would say that our team is doing very well in, again, what we consider to be probably more of a trough market. The business is still finding its way into some very good results.

Okay. Thank you. I'll pass the line.

Thank you. The next question comes from Hamir Patel at CIBC. Please go ahead.

Hi, good morning. Rob, can you speak to how the M&A pipeline is looking and, you know, are there any sort of product areas that are looking most compelling today?

Hey, good morning, Hamir. Yeah, the pipelines looks very good. We've got a large opportunity set that we've continued to, kind of nurture here as we've delivered through the course of the year. Fez commented on where the balance sheet should finish the year. That gives us a significant amount of dry powder to do some things on the M&A front next year. And we've got discussions and opportunities that I would be optimistic about us getting something done on the M&A front next year and getting back to that additional growth. We've enjoyed the benefit this year. starting to fall off the table, but of having the acquisitive growth piece of the Wolf deal that we did last year. And we expect that to continue to be a key part of the Edentra growth story. In terms of particular areas that we're focused on, no change there. I think we've said in the past we cast a very wide net in terms of looking at opportunities. There are some geographies that we think are a little bit more attractive, than others, and then there's the theme that we continue to want to add products to our mix that are higher value specialty branded products that continue to improve the quality of the portfolio that we distribute.

Okay, great. Thanks. That's helpful. And, Rob, I know you're pointing to Q4 EBITDA, similar to Q1, which I guess was around $40 million. How should we think about how gross profit margins would fare in Q4 this year?

Hey, Hamir. It says here I can take that one. I think they'll be fairly consistent, Hamir, with Q3 and Q4. You know, our gross margin percentage at 21.4% is right in the range. If you look year-to-date, our gross margin percentage performance is actually quite consistent with last year, so I don't think there's any kind of things you wouldn't expect to note on that front. I think they'll be fairly consistent.

Great. Thanks, guys. I'll turn it over.

Thank you. The next question comes from Frederick Tremblay at Desjardins. Please go ahead.

Thank you. Good morning.

Hey, Frederick.

I just wanted to ask on the inventory reduction following what we saw in Q3, is there more coming in Q4? And if you could maybe help us get a better sense of the magnitude of that inventory reduction if you expect one.

Oh, hey, Frederick. Good morning. It's Feb here. So we do expect further inventory reductions into the fourth quarter. We took a good check out in the third quarter, and I think there's some more to go. So I think in terms of order of magnitude, it could be another sort of $15 to $20 million, plus or minus, that I think we'll get out in the fourth quarter. And that, I think, will position us as was mentioned in the comments to bring our leverage closer to the mid-twos between the cash that we take out of inventory and the cash that the business will just generate. As you saw in Q3 and in the previous quarters, we convert a healthy amount of our adjusted EBITDA to free cash flow, and we'll do that again in Q4 as well.

Great. That's very helpful. I wanted to ask about Canada. We saw a slight volume decrease in the quarter, and it was actually the second consecutive quarter of seeing slight decreases there in volumes. Do you feel that this is due to some of the pricing initiatives in the market or just general construction market softness, just trying to get a better sense of what's happening there?

Yeah, more general. I mean, as I like to use the phrase, it's in a range. It's not a massive concern to us. I think it's more representative of local market conditions that our Canadian business has performed. It's a star. It consistently performs. And so generally what we see in that business is representative of the conditions that are available in the market. The only other thing that we've got our eye on that's probably worth mentioning is the Section 232 tariffs do include cabinets. And there's two implications of that tariff for a denture. The first would be, if you look at our U.S. business, that will shut out. or make import cabinets more expensive, which will be advantageous to our U.S. customers that are cabinet manufacturers. So we supply, obviously, raw inputs to that as a customer base. And if there's tariffs on incoming cabinets from other jurisdictions, that's going to be net helpful to that customer. And then the second piece is some of those imports into the United States are cabinets, that are manufactured in Canada. So that would be a bit of a pullback for our Canadian cabinet customer manufacturing base. The net between the two is tilted to our U.S. customer base just because of our representation in that country. But that's the only thing I would point out that's kind of specific to Canadian manufacturing environment going forward.

Great. Thank you, Rod, for that cover, and congrats on the great quarter. Okay. Thanks, Fred.

Thank you. The next question comes from Zachary Evershed at National Bank. Please go ahead.

Good morning, everyone. Congrats on the quarter. Hi, Zach. I'll actually take the inverse of Fred's question. Given the stronger pricing that you saw in Canada as well, is there a broader trend back up in pricing even after you adjust for the effect of tariffs?

I mean, things are getting more expensive, I think is the theme. Even if you think of the impact of tariffs, generally what we see when we have those types of things happen is you also have domestic producers. And I would just remind that domestic sourcing is the majority of our business. We augment that with import supply solutions for our customers, but the greater bulk of what we're doing is with domestics. But when there is trade disruption, that generally forces prices up, lifts all boats, whether it's domestic or import. And yeah, so I mean, we saw that in the quarter where we had a little bit of price appreciation. That's really at the beginning of the story around tariffs, because you'll recall, up until the recent 232 trade ruling, most of our tariffs were set to the side, you know, or most of our goods that were imported were not tariffed. That number has really doubled now up to the 30% that we disclosed at the average country rate of 20%. So yeah, all in all, we're expecting prices over time to be a little bit firmer. And we'll do our pieces we've described around price pass-through related to that.

Great, Kelly. Thanks. And on that topic, how do your customers typically react when you do try to take profit on a visible externality like tariffs? Because I think I heard you mention your dynamic pricing is to maintain gross margin percentage.

Yeah, I mean, we are a distributor. We're not here to kind of time the market or such. We expect to kind of get paid for the service provided, and this is a well-worn road that that's our role in channel and within the supply chain. We can look back at other exogenous events, COVID being the most recent one, and we're We followed the same playbook, and I would add, as did the rest of the industry and the competitor set. So we're not out there on our own. We're a distributor, and we're going to do our piece and channel and take the gross profit margin that's attached to that.

Thank you. And on your outlook for CapEx, any pockets of strength that are worth growth investments?

No, nothing stands out. We really characterize our CapEx as maintenance. We do the occasional things in terms of expanding some of our light manufacturing in markets where there's good payback to that, but it just doesn't really stand out because it's such a capital light model that we're operating. It's a $10 or $12 million spend per year.

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

Thank you. The next question comes from Jonathan Goldman at Scotiabank. Please go ahead.

Hi. Good morning, and thanks for taking my questions. Could you remind us what's the lag between when you put through new tariffs or higher pricing and it hits your P&L? And then I guess given the higher tariffs, the exposure that you have now, is it reasonable to expect that pricing to accelerate or are the other factors that you mentioned, Rob, maybe like higher channel inventory and competitive dynamics, enough to mitigate any sort of higher pricing we might see quarter on quarter?

Yeah, that's a good question. Good morning, Jonathan. I think on the pricing acceleration, I don't expect an acceleration in Q4. I think the comments I made earlier, which you just referenced, of the latency are probably the most realistic scenario. But, I mean, we did have some price increases in Q3. That was helpful. But I don't think the rate of change is likely to accelerate, at least in the short term here. In terms of the lag, that really depends a little bit, again, on those same factors and what the market's willing to bear. But As our cost of sales or, you know, our sourcing costs go up, we don't wait. We start to put those through, but it's really somewhat averaged across the inventory that we've got. There could be a little bit of a delay, but I think it really comes down to more what's the magnitude of the price change. And at this point, we don't see a massive short-term magnitude of price change emerging. Okay.

Okay, that's really good, Colin. And then I guess maybe switching to the expenses. I appreciate you guys really quantifying the mark-to-market adjustment there. But you did also call out inflationary pressures on wages and facilities. I guess, do you expect that to continue into Q4? And I guess maybe thinking a little longer term, how should we think about your ability to drive operating leverage in a flat demand environment?

Hey, Jonathan, it's Seth here. On your first question into Q4, I would say probably no significant shifts on a sequential basis. On the premise and the people, I think we've kind of taken those for the year. And we've got some things to manage around those too. You know, our headcount's down a little bit year over year. Our facility count's actually down a little bit as well. We've done some rationalization there where it makes sense to try and offset some of those inflationary increases. So for Q4, I think your assumption kind of Q3 to Q4, it's probably pretty similar on those line items, which are the majority of our expenses, I think is probably a fair assumption. In terms of how to think about operating leverage in a flat demand environment, I think we've got strategies in place that are working below the top line as well. So in terms of increasing our gross margin percentage over time and continuing to be tight on expenses, those are things that we just do every year. Year-to-date for operating expenses, if you take out all the kind of one-time things, you know, transaction costs related to acquisitions, we have the trade case recovery. Just the organic expenses are up kind of about 2% year-over-year. which is less than the rate of inflation. So we do have the ability to continue to be sharp on costs and manage those down. And I think you'll see us continue to do that into 2026. But in terms of where, how the business model is set up today, Jonathan, we've cut, but we've not cut too deep. So the way I would describe it is when we do see, even if it's kind of a low growth environment, I think a lot of that's going to fall directly to the bottom line. We've kind of set ourselves up from a business model and an expense-based perspective to achieve that.

Okay, that's helpful. And then I guess maybe one more for me on the M&A, and you guys talked about that potentially in 26 and the leverage coming down. Have you noticed any change in seller expectations or valuations that you're seeing in the private space, maybe relative to public multiples?

Not really. Just because the public and private multiples, the headline-grabbing public multiples are for businesses that are such substantially different in scale that they don't translate between the two. So, I mean, from our perspective, no, we're just going to still operate in similar ranges we've discussed in the past. The thing that's the flex is how folks are doing on on their EBITDA profile and what we consider to be sustainable EBITDA going forward. We've done quite well this year, I think, in the market environment that's been available. Others, you know, maybe not as strong a performance. And those are things that enter into the discussions when we are in kind of M&A mode with some of our targets. Okay, I appreciate the time. I'll get back in queue.

Thanks.

Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1. The next question is a follow-up from Kyle McPhee at Cormark. Please go ahead.

Hello again. Can you remind us or explain for us the timing lag for Aiden to benefit from a cycle turn? As we eventually see new starts up, rates down, home inventory turnover up, how long until it typically translates to organic volume tailwind for your business?

Yeah, I would say that if you think about new residential construction, so housing starts, that's generally – a couple of quarters because we are more in the finishing stages. And if you think of the repair and remodel market, that's more immediate. And our participation, particularly on the home center side, can be quite immediate. So we've got a good mix there that we consider to be quite well diversified. The commercial segment, which is about 20% of what we do, I would describe as it's always kind of a little bit more in steady state. It may be going up a little bit or going down a little bit, kind of a rolling hills profile. So that one I would just describe as more stable and as it kind of waiting around and having movements in the way I described the first two. So, you know, long answer to your question. The shorter answer would be You know, it's a quarter to two to three quarters, depending on what sector you're talking about in the economy.

Okay, appreciate that, Keller. And last one. Does, you know, does the uncertainty with the demand environment, whether or not this is lower for longer, does that impact your willingness to do M&A? I know you have the pipeline, but does it impact your willingness, you know, using your balance sheet that's quickly deleveraging here to fund the deal flow? Or does deal flow get delayed, or maybe you prioritize smaller stuff over larger stuff, just waiting for more macro clarity? Any color on that would be appreciated. Thanks.

No. I mean... From our perspective, our volumes are stable. We've got some price appreciation. Gross profit margin is being well managed. Cost is disciplined, like Fez said. We've got a really high free cash flow conversion rate, and our leverage is coming down. And then, by the way, the tariff landscape is visible, at least for now. So I don't think any of those things have us on the sidelines. We've said that the pipeline is encouraging. And now we've got the balance sheet back to where we want to be active again. So we're not sitting waiting for some massive change in macro to release us. This will be normal course that we're executing on some M&A opportunities as we go. Generate cash flow, put it to work.

Thank you. We have no further questions. I will turn the call back over to Rob Brown for closing comments.

Okay. Thanks, Joanne. Nice job. Appreciate your help today and everybody for joining us. Reach out to President Ai if you've got any follow-ups. We'd be happy to chat further. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your line.