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ADENTRA Inc. — Management Reports 2024
Mar 18, 2024
46856_rns_2024-03-18_71951d6b-1211-4eff-92f6-3fc6922bf954.pdf
Management Reports
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Management’s Discussion and Analysis
This management's discussion and analysis ("MD&A") has been prepared by ADENTRA Inc., hereby referred to as "ADENTRA" or the "Company", as of March 15, 2024. This MD&A should be read in conjunction with the audited consolidated financial statements and accompanying notes ("Audited Financial Statements") of the Company for the years ended December 31, 2023 and 2022. Results are reported in US dollars unless otherwise stated. The financial information contained herein has been prepared in accordance with lFRS Accounting Standards ("IFRS"), unless otherwise indicated. For additional information, readers should also refer to our Annual Information Form and other information filed on www.sedarplus.ca.
Non-GAAP and Other Financial Measures
In this MD&A, reference is made to the following
non-GAAP financial measures:
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"Adjusted EBITDA" is EBITDA before long term incentive plan ("LTIP") expense, accrued trade duties (refer to section 8.0), professional fees, and transaction expenses. We believe Adjusted EBITDA is a useful supplemental measure for investors, and is used by management, for evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
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"Adjusted net income" is net income before LTIP expense, accrued trade duties (refer to section 8.0), professional fees and transaction expenses. We believe adjusted net income is a useful supplemental measure for investors, and is used by management, for evaluating our profitability, our ability to meet debt service and capital expenditure requirements, our ability to generate cash flow from operations, and as an indicator of relative operating performance.
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"EBITDA" is earnings before interest, income taxes, depreciation and amortization, where
interest is defined as net finance income (expense) as per the consolidated statement of comprehensive income. We believe EBITDA is a useful supplemental measure for investors, and is used by management, for evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
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"Organic growth" and "acquisition-based growth" consists of quantifying the change in total sales as either related to organic growth or acquisition based growth, or the impact of foreign exchange. Total sales earned by acquired companies in the first 12 months following an acquisition is reported as acquisition-based growth and thereafter as organic growth. Organic growth excludes the impact of acquisitions and foreign exchange impact related to the translation of Canadian sales to US dollars. From time to time, we also quantify the impacts of certain unusual events to organic growth to provide useful information to investors to help better understand our financial results.
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"Working capital" is accounts receivable, inventory, and prepaid expenses, partially offset by short-term credit provided by suppliers in the form of accounts payable and accrued liabilities. We believe working capital is a useful indicator for investors, and is used by management, for evaluating the operating liquidity available to us.
In this MD&A, reference is also made to the following
non-GAAP ratios:
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"Adjusted basic earnings per share" and "Adjusted diluted earnings per share" are, respectively, basic earnings per share and diluted earnings per share, in each case, before LTIP expense, accrued trade duties (refer to section 8.0), professional fees and transaction expenses. We believe "adjusted basic earnings per share" and "Adjusted diluted earnings per share" are useful supplemental measures for investors, and are used by management, for evaluating our profitability, our ability to meet debt service and capital expenditure requirements, our ability to generate cash flow from operations, and as an indicator of relative operating performance.
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"Adjusted EBITDA margin" is Adjusted EBITDA as a percentage of sales. We believe Adjusted EBITDA margin is a useful supplemental measure for investors, and is used by management, for evaluating our profitability, our ability to meet debt service and capital expenditure requirements, our ability to generate cash flow from operations, and as an indicator of relative operating performance.
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"Leverage Ratio" is net debt as compared to Adjusted EBITDA after rent payments related to warehousing and trucks. We believe Leverage Ratio is a useful supplemental measure for investors, and is used by management, for evaluating our profitability, our ability to meet debt service requirements, assessing our capital structure and how to finance organic and inorganic growth, our ability to generate cash flow from operations, and as an indicator of relative operating performance.
Such non-GAAP financial measures and non-GAAP ratios are not standardized financial measures under IFRS and might not be comparable to similar financial measures disclosed by other issuers. For a reconciliation between non-GAAP measures and non-GAAP ratios and the most directly comparable financial measure in our financial statements, please refer to the discussion of Results of Operations described in section 3.0, Working Capital in section 5.2, and Revolving Credit Facilities and Debt Management Strategy in section 5.3 of this report.
Annual Report 2023
14
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1.0 Executive Summary
1.1 Highlights
We successfully navigated 2023's challenging macroeconomic environment to achieve solid full-year results, including total sales of $2.2 billion, a gross profit margin of 20.8%, Adjusted EBITDA of $185.2 million, $1.61 of basic earnings per share, and adjusted basic earnings per share of $2.43.
Our fourth quarter performance was notable. Sales volumes stabilized year-over-year, contributing to Q4 sales of $514.9 million. Our gross margin reached 21.6%, the highest of the year, and marked our 11th consecutive quarter with a gross margin above 20%. This, together with a $5.5 million reduction in operating expenses, helped to drive a 2% year-overyear increase in fourth quarter Adjusted EBITDA to $44.5 million as compared to the same period in the prior year, with basic earnings per share of $0.40, and adjusted basic earnings per share of $0.46.
Summary financial highlights (2023 as compared
to 2022, unless otherwise noted)
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Generated full-year sales of $2.2 billion, compared to $2.6 billion in 2022; a decrease of 13.2% attributable equally to a decrease in volumes and product prices; Q4 sales of $514.9 million, compared to $574.7 million in Q4 2022
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Gross margin percentage of 20.8% in 2023; Q4 gross margin percentage of 21.6%, representing our eleventh consecutive quarter with a gross margin percentage above 20.0%
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Operating expenses, after adjusting for accrued trade duties, decreased by $1.8 million to $358.3 million in 2023 despite significant inflationary pressures across the economy. Q4 operating expenses , decreased by $5.5 million, or 6.0%, to $86.1 million
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Adjusted basic earnings per share was $2.43 in 2023, compared to $5.71 in 2022; Q4 adjusted basic earnings per share was $0.46, as compared to $0.66 per share in Q4 2022
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Full-year Adjusted EBITDA was $185.2 million, compared to $267.9 million in 2022; Q4 Adjusted EBITDA increased to $44.5 million, up 2% from $43.6 million in Q4 2022
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Generated strong cash flow from operating activities of $238.1 million in 2023, including $56.5 million in Q4 2023
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Effectively deployed capital in 2023 , returning $17.8 million in cash to shareholders via dividends and share repurchases, and reducing debt by $223.6 million
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Announced an 8% increase to the quarterly dividend to C$0.14 per share, or C$0.56 annually, effective November 8, 2023
While our 2023 results did not match the record breaking performance of 2022, which benefited from unusually strong demand and tight supply, they underscore ADENTRA's ability to generate solid and predictable results in challenging operating conditions. Our sales demonstrated considerable resilience, remaining largely stable sequentially from quarter to quarter outside of normal seasonal fluctuations. This stability was supported by our large and geographically diverse network, expanded channels to market, strong participation in both the residential and repair and remodel construction sectors, and broader product mix.
As noted above, we also maintained a gross margin percentage above 20% in every quarter, a significant achievement given industry-wide price deflation and our release of $120.8 million of excess inventory during the year. Our strong gross margin performance reflects the cumulative impact of multiple strategies, including our acquisitions of Novo (2021) and Mid-Am (2022), which brought us a higher-margin product mix. Additionally, our increased focus on high-value, installationready products, continued strong performance from our global sourcing business, our commitment to pricing discipline, and efficiencies generated by our digital strategies have all contributed to this success.
As we anticipated, our business model continued to efficiently generate cash flow in 2023, with over 60% of Adjusted EBITDA converting to $118.2 million of cash flow from operations before working capital. Moreover, our strategic steps to release excess inventory contributed an additional $120 million to cash flow by freeing up working capital. This ability to reduce working capital and generate additional cash flow in slower economic cycles is a key feature of our business model.
Our strong cash flow generation enabled us to lower our bank indebtedness by over $223 million in 2023, including $42 million in the fourth quarter. Our balance sheet strengthened accordingly, with our Leverage Ratio decreasing to 2.7x at year-end (see section 5.3). We ended the year with significant unused borrowing capacity of over $450 million, which will enable us to continue to manage short-term economic headwinds, fund anticipated future growth and continue executing on our strategies.
Our capital allocation priorities going forward will include a continued focus on repayment of debt and growth through acquisitions. Dividends are also an important component of our capital allocation plan. On November 8, 2023, ADENTRA's Board of Directors approved a dividend of C$0.14 per share paid on January 26, 2024 to shareholders of record as at January 15, 2024. As it relates to share repurchases, we repurchased 421,811 common shares for $9.2 million in 2023, representing almost 2% of our outstanding share count as at the beginning of the year. Combined with our dividend, we have returned $17.8 million to shareholders in 2023.
1.2 Recent Acquisitions
Over the past five years we have completed eight acquisitions, adding annual pro forma revenue of almost $1.1 billion. These transactions have diversified our product offering such that no individual product category exceeds 20% of our pro forma sales mix. The new businesses have also significantly expanded the proportion of our revenues sourced from higher margin specialty products and have broadened our customer segments to include fabricators, pro dealers, and home centers, increasing our access to large new addressable markets.
Rojo Distributors
On February 13, 2023 we completed the acquisition of Rojo, a single location architectural grade building products distributor serving the West Texas market. The purchase price was $1.3 million, subject to final working capital adjustments. Strategically, Rojo complements our current footprint in West Texas and includes a product mix focused on decorative surfaces and accessories.
Mid-Am Acquisition
On February 4, 2022 we completed the acquisition of Mid-Am, a leading distributor of architectural grade products to pro dealers in the US Midwest, for a total purchase price of $273.7 million, including $3.6 million of final working capital adjustments (the "Mid-Am Transaction"). Mid-Am generated annual pro forma revenues of over $290 million in 2022.
Strategically, the Mid-Am acquisition represents a natural geographic extension to our current footprint, providing access to customers and markets in the US Midwest that we did not reach previously. Mid Am's product mix includes doors, millwork and other diversified building materials, which is complementary to our own.
1.3 Outlook
Moving into 2024, the inflation and interest rate hikes of recent years are expected to continue to moderately impact economic activity. While our sales volumes have stabilized in recent quarters, we continue to experience softness in product pricing. Forecasters are anticipating a stable environment for residential construction in 2024, and a stable-to-lower year of demand for the repair and remodel market. Each of these markets represents approximately 40% of our business respectively. We expect first quarter 2024 sales to be lower than in the same period in 2023,
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Annual Report 2023
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with higher volumes being offset by weaker product prices year-over-year. Sales comparisons to 2023 are expected to improve in the latter half of the year. In this environment, we anticipate modest growth in 2024 Adjusted EBITDA, driven by continued gross margin strength and disciplined management of operating expenses.
As we have demonstrated in previous business cycles and most recently in 2023, we are adept at managing our business and cash flows effectively in challenging market conditions. Our size and scale, together with the diversity in our product categories, customer channels and end-markets, provide important stability while reducing our exposure to any one geography or segment of the industry. Our strong balance sheet provides financial stability as we move through periods of changing market conditions, and our business model is expected to continue converting a high proportion of EBITDA to operating cash flows before changes in working capital. In addition, our investment in working capital typically decreases during periods of reduced activity, resulting in an additional source of cash.
Over the longer term our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock. Forecasters are also anticipating potential interest rate cuts in the latter half of 2024, which could further support end-market demand for our products. We continue to see a multi year runway for growth in the repair and remodel, residential, and commercial markets we participate in.
Introducing Revised Targets
At our analyst day in December 2022 we unveiled our strategic priorities and plans to continue creating shareholder value. These priorities included our Destination 2026 goal of $3.5 billion in run rate sales by 2026.
In 2023, the impact of the challenging macroeconomic environment, including industry-wide volume retraction and product price deflation, was stronger than we anticipated in our Destination 2026 plan. As noted in our outlook above, we also do not expect the market to grow meaningfully in 2024.
As a result of these factors, we have modified our plan with the revised goal of achieving $3.5 billion in runrate sales by 2028, or the "Destination 2028" goal.
The other key metrics underpinning our $3.5 billion sales goal have not changed significantly from what was presented in the original plan. For further information, please refer to our investor presentation which is posted on the Company website.
2.0 Business and Industry
Overview
Serving customers for over 60 years. ADENTRA is one of North America's largest distributors of architectural building products to the residential, repair and remodel and commercial construction markets. We operate 86 facilities across North America. Certain of these facilities include light manufacturing capabilities. which enable us to create custom millwork packages for our customers.
Our product mix comprises a wide array of products, including doors, decorative surfaces, mouldings, stair parts, hardwood lumber, hardwood plywood, composite panels, and other building products. Many of our product lines are complementary, and we typically sell our customers some combination of key products from the categories described.
Our primary role in the industry is to provide the critical link between suppliers that generally manufacture and want to sell large volumes of certain products, and customers that generally require lesser quantities of many different products on a just-in-time basis. In addition to fulfilling this essential role in the supply chain, we provide value-added services when some level of customization is required by our customers.
Our customers include industrial manufacturers, home builder distribution yards ("Pro Dealers"), and home centers.
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Industrial manufacturers are comprised of thousands of small to mid-sized customers that require materials on a just-in-time basis, typically need a wider range of products than they can source from any one mill, and seek time to pay in the form of credit terms. These customers manufacture a range of end-use products including cabinetry, furniture and custom millwork.
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Pro Dealers are comprised of smaller and larger customers that manufacture and supply building materials to both custom and production home builders. Pro Dealers require us to manage the complex supply chain and lead times associated with the architectural building products that we sell. Increasingly, Pro Dealers also want to align with suppliers like ADENTRA that have a national footprint and that can work with them on an organized and consistent basis across multiple regions.
• Home centers are comprised of building materials retailers such as Lowe's, Home Depot, Marvin's, and McCoy's. The majority of our home center customers "turn over the aisle" to ADENTRA and require us to be a full category manager. This includes managing the complex supply chain and lead times associated with the architectural products that we sell, determining what product to stock in which locations, shipping the product to each individual store and physically replenishing the aisle, counting and culling inventory as needed, training home center staff on the product, and supporting e-commerce activities.
As it relates to our suppliers, we add value by buying their products in volume and paying them promptly, by providing access to our large North American distribution network, and by supporting their products with strong sales and marketing support. We effectively act as their third-party sales force.
Customers sell our products across multiple sectors of the economy, including new home construction, renovation, non-residential construction, institutional markets and manufacturing. As a result of this diversity, it is difficult to determine with certainty how our sales break out across these sectors. We estimate that approximately 40% of our products end up in
new residential construction and another 40% in the repair and remodel end markets. We estimate that the remaining 20% ends up in other sectors of the economy not associated with new residential construction, such as finishing millwork for office buildings, recreational vehicles, restaurant and bar interiors, hotel lobbies, retail point-of-purchase displays, schools, hospitals, custom motor coaches, yacht interiors and other specialty areas.
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Annual Report 2023 18
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3.0 Results of Operations
Analysis of Specific Items Affecting Comparability
(in thousands of US dollars, except per share amounts and percentages)
3.1 Years Ended December 31, 2023 and 2022
Selected Consolidated Financial Information
(in thousands of US dollars, except otherwise noted, per share amounts and percentages)
| For the year ended | For the year ended | For | the year ended | $ Increase | % Increase | ||
|---|---|---|---|---|---|---|---|
| December 31 | December 31 | (Decrease) | (Decrease) | ||||
| 2023 | 2022 | ||||||
| Total sales | $ | 2,239,324 |
$ | 2,579,568 |
$ | (340,244) | (13.2)% |
| Sales in the US | 2,069,660 | 2,380,659 | (310,999) | (13.1)% | |||
| Sales in Canada (CAD$) | 228,995 | 258,840 | (29,845) | (11.5)% | |||
| Gross proft | 466,102 | 556,749 | (90,647) | (16.3)% | |||
| Gross proft % | 20.8% | 21.6% | |||||
| Operating expenses | (373,797) | (360,117) | 13,680 | 3.8% | |||
| Income from operations | $ | 92,305 |
$ | 196,632 |
$ | (104,327) | (53.1)% |
| Add: Depreciation and amortization | 69,857 | 65,455 | 4,402 | 6.7% | |||
| Earnings before interest, taxes, depreciation | |||||||
| and amortization ("EBITDA") | $ | 162,162 |
$ | 262,087 |
$ | (99,925) | (38.1)% |
| EBITDA as a % of revenue | 7.2% | 10.2% | |||||
| Add (deduct): | |||||||
| Depreciation and amortization | (69,857) | (65,455) | (4,402) | ||||
| Net fnance expense | (49,406) | (33,862) | (15,544) | ||||
| Income tax expense | (6,851) | (34,102) | 27,251 | ||||
| Net income for the period | $ | 36,048 |
$ | 128,668 |
$ | (92,620) | (72.0)% |
| Basic earnings per share | $ | 1.61 |
$ | 5.50 |
|||
| Diluted earnings per share | $ | 1.59 |
$ | 5.47 |
|||
| Average US dollar exchange rate | |||||||
| for one Canadian dollar | $ | 0.741 |
$ | 0.768 |
| For the year ended | For the year ended | For the | year ended | $ Increase | % Increase | ||
|---|---|---|---|---|---|---|---|
| December 31 | December 31 | (Decrease) | (Decrease) | ||||
| 2023 | 2022 | ||||||
| Earnings before interest, taxes, depreciation and | |||||||
| amortization ("EBITDA"), per table above | $ | 162,162 | $ | 262,087 | $ | (99,925) | (38.1)% |
| LTIP expense | 7,440 | 3,899 | 3,541 | ||||
| Accrued trade duties | 15,640 | — | 15,640 | ||||
| Transaction expense and professional fees | — | 1,953 | (1,953) | ||||
| Adjusted EBITDA | $ | 185,242 | $ | 267,939 | $ | (82,697) | (30.9)% |
| Adjusted EBITDA as a % of revenue | 8.3% | 10.4% | |||||
| Net income for the period, as reported | $ | 36,048 |
$ | 128,668 | $ | (92,620) | (72.0)% |
| Adjustments, net of tax | 18,307 | 4,909 | 13,398 | ||||
| Adjusted net income for the period | $ | 54,355 |
$ | 133,577 | $ | (79,222) | (59.3)% |
| Basic earnings per share, as reported | $ | 1.61 | $ | 5.50 |
$ | (3.89) |
(70.7)% |
| Net impact of above items per share | 0.82 | 0.21 | 0.61 | 290.5 % | |||
| Adjusted basic earnings per share | $ | 2.43 |
$ | 5.71 |
$ | (3.28) |
(57.4)% |
| Diluted earnings per share, as reported | $ | 1.59 |
$ | 5.47 |
$ | (3.88) |
(70.9)% |
| Net impact of above items per share | 0.81 | 0.21 | 0.60 | 285.7 % | |||
| Adjusted diluted earnings per share | $ | 2.40 |
$ | 5.68 |
$ | (3.28) |
(57.7)% |
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Annual Report 2023
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Sales
For the year ended December 31, 2023, we generated total sales of $2.24 billion, as compared to the record setting $2.58 billion we achieved in 2022 during a period of unusually high demand and product price inflation. The $340.2 million, or 13.2%, decrease primarily reflects a $362.6 million reduction in organic sales, partially offset by $28.6 million of incremental revenue from our acquisitions of Mid-Am and Rojo. The decrease in organic sales resulted from roughly equal parts lower volumes and product price deflation. The remaining $6.3 million of sales impact reflects an unfavorable foreign exchange impact related to the translation of Canadian sales to US dollars for reporting purposes.
Sales in the US
Full-year sales from our US operations totaled $2.07 billion, as compared to $2.38 billion in 2022. The $311.0 million, or 13.1%, decrease reflects a $339.6 million year-over-year reduction in organic sales following the record-setting pace of 2022. The change in organic sales resulted from roughly equal parts lower volumes and product price deflation, partially offset by $26.4 million in additional revenue from a full year of Mid-Am's results, compared to just under 11 months of contribution in the same period last year. Full-year US sales also include $2.3 million of contribution from the Rojo business acquired in the first quarter.
Sales in Canada
In Canada, full-year sales totaled C$229.0 million, as compared to C$258.8 million in 2022. This C$29.8 million, or 11.5%, decrease primarily reflects equal parts lower volumes and product price deflation.
Gross Profit
Gross profit for the year ended December 31, 2023 was $466.1 million, as compared to $556.7 million in 2022. The $90.6 million, or 16.3%, year-over-year decrease reflects lower organic sales and a gross profit percentage of 20.8%, as compared to 21.6% in 2022. Our 2022 gross profit percentage was elevated during
the first half of the year by favorable market dynamics, including strong demand and tight supply.
Operating Expenses
For the year ended December 31, 2023, operating expenses increased by $13.7 million to $373.8 million (16.7% of sales), from $360.1 million (14.0% of sales) in the same period last year. The $13.7 million increase reflects accrued trade duties of $15.6 million as further described in section 8.0, partially offset by, savings related to increased operating efficiency.
Excluding the accrued trade duties, operating expenses decreased by $1.8 million year-over-year to $358.3 million, and operating expense as a percentage of sales was 16.0%, as compared to 14.0% in 2022. The reduction in operating expenses was primarily driven by a $6.5 million decrease in organic expenses, partially offset by $3.7 million in additional operating expenses from the inclusion of a full year's results from the Mid-Am operations and $1.0 million of amortization on intangible assets acquired in connection with the Mid-Am acquisition.
Depreciation and Amortization
For the year ended December 31, 2023, depreciation and amortization increased to $69.9 million, from $65.5 million in 2022, reflecting a $4.4 million increase. This includes $1.5 million of incremental depreciation and amortization related to the Mid-Am acquisition, with the remaining $2.9 million attributed to higher depreciation on premise leases in our operations. Of the total $69.9 million, $22.1 million represents amortization on acquired intangible assets, compared to $21.3 million in the prior year.
Net Finance Expense
For the year ended December 31, 2023, net finance expense increased to $49.4 million, from $33.9 million in 2022. Of this total, $37.0 million represented interest on bank borrowing, up from $26.8 million in the prior year, reflecting higher interest rates on bank indebtedness in the current period. As discussed in section 5.5, we have entered into an interest rate swap to mitigate some of our exposure to interest rate variability.
Income Tax Expense
For the year ended December 31, 2023, income tax expense decreased to $6.9 million, from $34.1 million in 2022, primarily reflecting lower taxable income. The effective tax rate for 2023 was 16.0%, as compared to 21.0% last year. This improvement primarily reflects the benefit of other restructuring.
Adjusted EBITDA
In 2023, we generated 2023 Adjusted EBITDA of $185.2 million, compared to $267.9 million in 2022. This $82.7 million, or 30.9%, change primarily reflects the $90.6 million decrease in gross profit, partially offset by the $7.9 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, transaction expense and professional fees, and accrued trade duties).
Net Income for the Year
We achieved net income of $36.0 million in 2023, as compared to $128.7 million in 2022. The $92.6 million, or 72.0%, decline was primarily driven by the $99.9 million decrease in EBITDA, $15.5 million increase in net finance expense, and $4.4 million increase in depreciation and amortization, partially offset by the $27.3 million decrease in income tax expense.
For the year ended December 31, 2023, we generated basic earnings per share of $1.61, as compared to $5.50 in 2022. Our adjusted net income was $54.4 million, compared to $133.6 million in 2022, resulting in adjusted basic earnings per share of $2.43, as compared to $5.71 in the previous year.
Annual Report 2023 22
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3.2 Three-Month Periods Ended December 31, 2023 and 2022
Selected Consolidated Financial Information
(in thousands of US dollars, except otherwise noted, per share amounts and percentages)
| Three months ended | Three months ended | Three months ended | Three months ended | $ Increase | % Increase | ||
|---|---|---|---|---|---|---|---|
| December 31 | December 31 | (Decrease) | (Decrease) | ||||
| 2023 | 2022 | ||||||
| Total sales | $ | 514,859 | $ | 574,734 | $ | (59,875) | (10.4)% |
| Sales in the US | 475,978 | 533,179 | (57,201) | (10.7)% | |||
| Sales in Canada (CAD$) | 53,014 | 56,987 | (3,973) | (7.0)% | |||
| Gross proft | 111,353 | 116,174 | (4,821) | (4.1)% | |||
| Gross proft % | 21.6% | 20.2% | |||||
| Operating expenses | (86,090) | (91,567) | (5,477) | (6.0)% | |||
| Income from operations | $ | 25,263 | $ | 24,607 | $ | 656 |
2.7 % |
| Add: Depreciation and amortization | 17,736 | 16,931 | 805 | 4.8% | |||
| Earnings before interest, taxes, depreciation | |||||||
| and amortization ("EBITDA") | $ | 42,999 | $ | 41,538 | $ | 1,461 |
3.5 % |
| EBITDA as a % of revenue | 8.4% | 7.2% | |||||
| Add (deduct): | |||||||
| Depreciation and amortization | (17,736) | (16,931) | (805) | ||||
| Net fnance expense | (12,420) | (13,765) | 1,345 | ||||
| Income tax (expense) recovery | (3,846) | 2,548 | (6,394) | ||||
| Net income for the period | $ | 8,997 | $ | 13,390 | $ | (4,393) |
(32.8)% |
| Basic earnings per share | $ | 0.40 | $ | 0.59 | |||
| Diluted earnings per share | $ | 0.40 | $ | 0.58 | |||
| Average US dollar exchange rate for one | |||||||
| Canadian dollar | $ | 0.734 | $ | 0.736 |
Analysis of Specific Items Affecting Comparability
(in thousands of US dollars, except per share amounts and percentages)
| Three months ended | Three months ended | Three months ended | Three months ended | $ | Increase | % Increase | |
|---|---|---|---|---|---|---|---|
| December 31 | December 31 | (Decrease) | (Decrease) | ||||
| 2023 | 2022 | ||||||
| Earnings before interest, taxes, depreciation | and | ||||||
| amortization ("EBITDA"), per table above | $ | 42,999 | $ | 41,538 | $ | 1,461 | 3.5% |
| LTIP expense | 1,454 | 972 | 482 | ||||
| Transaction expense and professional fees | — | 1,061 | (1,061) | ||||
| Adjusted EBITDA | $ | 44,453 | $ | 43,571 | $ | 882 | 2.0 % |
| Adjusted EBITDA as a % of revenue | 8.6% | 7.6% | |||||
| Net income for the period, as reported | $ | 8,997 | $ | 13,390 | $ | (4,393) | (32.8)% |
| Adjustments, net of tax | 1,344 | 1,653 | (309) | ||||
| Adjusted net income for the period | $ | 10,341 | $ | 15,043 | $ | (4,702) | (31.3)% |
| Basic earnings per share, as reported | $ | 0.40 | $ | 0.59 | $ | (0.19) | (32.2)% |
| Net impact of above items per share | 0.06 | 0.07 | (0.01) | ||||
| Adjusted basic earnings per share | $ | 0.46 | $ | 0.66 | $ | (0.20) | (30.3)% |
| Diluted earnings per share, as reported | $ | 0.40 | $ | 0.58 | $ | (0.18) | (31.0)% |
| Net impact of above items per share | 0.06 | 0.07 | (0.01) | ||||
| Adjusted diluted earnings per share | $ | 0.46 | $ | 0.65 | $ | (0.19) | (29.2)% |
Sales in Canada
Sales
In Canada, fourth quarter sales of C$53.0 million were C$4.0 million, or 7.0%, lower than the same period in 2022. The year-over-year decrease primarily reflects product price deflation, partially offset by higher volumes.
For the three months ended December 31, 2023, we generated total sales of $514.9 million, as compared to $574.7 million in Q4 2022. The $59.9 million, or 10.4%, primarily reflects product price deflation with volumes remaining relatively stable year-over year. Sales results were not significantly impacted by foreign exchange translation of Canadian sales to US dollars for reporting purposes.
Gross Profit
We generated fourth quarter gross profit of $111.4 million, compared to $116.2 million in the same period last year. The $4.8 million, or 4.1%, decrease is mainly attributed to lower sales, partially offset by a higher gross margin percentage. Our fourth quarter gross margin percentage increased to 21.6%, from 20.2% in Q4 2022. This improvement was supported by reduced inventory write-downs of $2.4 million in the current quarter, compared to $7.5 million in Q4 2022.
Sales in the US
Our US operations generated fourth quarter sales of $476.0 million, as compared to $533.2 million in the same period in 2022. The $57.2 million, or 10.7%, decrease primarily reflects product price deflation.
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Operating Expenses
Fourth quarter operating expense decreased by $5.5 million, or 6.0%, year-over-year to $86.1 million, while operating expenses as a percentage of sales were 16.7% as compared to 15.9% in the same period last year. The reduction in operating expenses primarily reflects lower staffing costs, including a reduction in variable compensation, and a decrease in premises costs.
Depreciation and Amortization
For the three months ended December 31, 2023, depreciation and amortization increased to $17.7 million, from $16.9 million in Q4 2022. Included in the $17.7 million was $5.5 million of amortization on acquired intangible assets, consistent with the same period last year.
Net Finance Expense
For the three months ended December 31, 2023, net finance expense decreased to $12.4 million, from $13.8 million in Q4 2022. This included $8.8 million of interest on bank borrowing, as compared to $9.7 million in Q4 2022. The decrease in interest expense primarily reflects lower bank indebtedness, partially offset by higher interest rates.
Income Tax Expense (Recovery)
For the three months ended December 31, 2023, we recognized an income tax expense of $3.8 million, compared to an income tax recovery of $2.5 million in the same period last year.
Net Income for the Period
Net income for the fourth quarter of 2023 was $9.0 million (basic earnings per share of $0.40), as compared to $13.4 million (basic earnings per share of $0.59) in Q4 2022. The $4.4 million, or 32.8%, decrease was driven by the $6.4 million increase in income tax expense and the $0.8 million increase in depreciation and amortization, partially offset by the $1.5 million increase in EBITDA and $1.3 million decrease in net finance expense.
We generated fourth quarter adjusted net income of $10.3 million, as compared to $15.0 million in Q4 2022. Adjusted basic earnings per share were $0.46, as compared to $0.66 in Q4 2022.
4.0 Selected Financial Information and Seasonality
4.1 Quarterly Financial Information
(in thousands of US dollars, except per share amounts)
| Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2023 | 2023 | 2023 | 2022 | 2022 | 2022 | 2022 | ||
| Sales | $514,859 | $558,673 | $585,935 | $579,857 | $574,734 | $659,685 | $700,263 | $644,883 | |
| Cost of goods sold | (403,506) | (440,366) | (466,486) | (462,864) | (458,560) | (520,721) | (546,434) | (497,102) | |
| Gross proft | 111,353 | 118,307 | 119,449 | 116,993 | 116,174 | 138,964 | 153,829 | 147,781 | |
| Selling and distribution | (61,127) | (61,953) | (64,424) | (64,582) | (66,245) | (64,222) | (63,939) | (59,732) | |
| Administration | (19,437) | (33,380) | (24,490) | (22,298) | (19,775) | (21,137) | (23,417) | (20,345) | |
| Amortization of acquired intangible assets | (5,526) | (5,527) | (5,505) | (5,548) | (5,548) | (5,543) | (5,519) | (4,695) | |
| Operating expenses | (86,090) | (100,860) | (94,419) | (92,428) | (91,568) | (90,902) | (92,875) | (84,772) | |
| Income from operations | 25,263 | 17,447 | 25,030 | 24,565 | 24,607 | 48,062 | 60,954 | 63,009 | |
| Net fnance expense | (12,420) | (12,662) | (12,105) | (12,219) | (13,765) | (8,926) | (5,789) | (5,382) | |
| Income before income taxes | 12,843 | 4,785 | 12,925 | 12,346 | 10,842 | 39,136 | 55,165 | 57,627 | |
| Current income tax recovery (expense) | 1,138 | 1,073 | (3,015) | (3,042) | (5,308) | (7,599) | (12,790) | (12,981) | |
| Deferred income tax (expense) recovery | (4,984) | 2,228 | (542) | 293 | 7,856 | (1,661) | (460) | (1,159) | |
| Income tax (expense) recovery | (3,846) | 3,301 | (3,557) | (2,749) | 2,548 | (9,260) | (13,250) | (14,140) | |
| Net income | 8,997 | 8,086 | 9,368 | 9,597 | 13,390 | 29,876 | 41,915 | 43,487 | |
| Other comprehensive income: | |||||||||
| Exchange differences translating | |||||||||
| foreign operations | 467 | (291) | 34 | (17) | (49) | (986) | (1,424) | 438 | |
| (Loss) gain on interest rate swap | (2,570) | 2,384 | — | — | — | — | — | — | |
| Total comprehensive income | 6,894 | 10,179 | 9,402 | 9,580 | 13,341 | 28,890 | 40,491 | 43,925 | |
| Basic earnings per share | 0.40 | 0.36 | 0.42 | 0.43 | 0.59 | 1.28 | 1.77 | 1.83 | |
| Fully diluted earnings per share | 0.40 | 0.36 | 0.42 | 0.42 | 0.58 | 1.27 | 1.76 | 1.82 | |
| EBITDA | 42,999 | 34,837 | 42,743 | 41,583 | 41,538 | 64,892 | 77,441 | 78,214 | |
| Adjusted net income | 10,341 | 20,736 | 12,510 | 10,769 | 15,043 | 30,833 | 42,964 | 44,737 | |
| Adjusted basic earnings per share | 0.46 | 0.93 | 0.56 | 0.48 | 0.66 | 1.32 | 1.81 | 1.88 | |
| Adjusted diluted earnings per share | 0.46 | 0.92 | 0.56 | 0.47 | 0.65 | 1.31 | 1.80 | 1.87 | |
| Adjusted EBITDA | 44,453 | 51,770 | 46,150 | 42,869 | 43,571 | 65,967 | 78,593 | 79,801 |
Adjusted EBITDA
Fourth quarter Adjusted EBITDA increased to $44.5 million, from $43.6 million in the same period in 2022. This $0.9 million, or 2.0%, year-over-year improvement largely reflects the $5.7 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, transaction expense and professional fees), partially offset by the $4.8 million decrease in gross profit.
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(in thousands of US dollars, except per share amounts)
5.0 Liquidity and Capital Resources
| Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |
|---|---|---|---|---|---|---|---|---|
| 2023 | 2023 | 2023 | 2023 | 2022 | 2022 | 2022 | 2022 | |
| Cash fow from operating activities | $37,597 | $25,939 | $24,674 | $29,980 | $21,701 | $42,901 | $42,715 | $75,326 |
| Changes in non-cash working capital: | 18,855 | 33,187 | 28,076 | 39,770 | 105,473 | 44,241 | (16,093) | (105,586) |
| Net cash from (used in) operating activities | 56,452 | 59,126 | 52,750 | 69,750 | 127,174 | 87,142 | 26,622 | (30,260) |
| Net cash (used in) from fnancing activities | (55,066) | (63,434) | (65,094) | (102,396) | (72,525) | (76,230) | (32,065) | 309,485 |
| Net cash (used in) from investing activities | (1,216) | (2,429) | (5,109) | (4,727) | 3,375 | (6,302) | (7,593) | (268,950) |
| (Increase) decrease in cash and cash | ||||||||
| equivalent | 170 | (6,737) | (17,453) | (37,373) | 58,024 | 4,610 | (13,036) | 10,275 |
| Cash and cash equivalents, beginning | ||||||||
| of period | 3,734 | 10,433 | 27,772 | 65,068 | 9,180 | 4,902 | 16,405 | 7,212 |
| Foreign exchange (loss) gain on cash | ||||||||
| held in foreign currency | (261) | 38 | 114 | 77 | (2,136) | (332) | 1,533 | (1,082) |
| Cash and cash equivalents, end of period | $ 3,643 | $ 3,734 | $ 10,433 | $ 27,772 | $ 65,068 | $ 9,180 | $ 4,902 | $ 16,405 |
The preceding tables provide selected quarterly financial information for our eight most recently completed fiscal quarters. This information is unaudited, but reflects all adjustments of a normal, recurring nature which are, in our opinion, necessary to present a fair statement of the results of operations for the periods presented. Quarter-to-quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Historically, the first and fourth quarters can be seasonally slower periods for our business. In addition, net earnings reported in each quarter may be impacted by acquisitions, foreign currency fluctuations, and changes in customer buying patterns, sales force, competition, pricing inputs, and supply constraints.
4.2 Annual Financial Information
(in thousands of dollars except per share amounts)
| For the year ended | For the year ended | For the year ended | For the year ended | |
|---|---|---|---|---|
| December 31 | December 31 | December 31 | ||
| 2023 | 2022 | 2021 | ||
| Total sales | $ 2,239,324 | $ | 2,579,568 |
$ 1,616,199 |
| Net income | 36,048 | 128,668 | 103,145 | |
| Basic earnings per share | 1.61 | 5.50 | 4.81 | |
| Fully diluted earnings per share | 1.59 | 5.47 | 4.77 | |
| Total assets | 1,232,119 | 1,428,974 | 1,114,924 | |
| Total non-current fnancial liabilities | 477,526 | 488,574 | 408,443 | |
| Dividends declared | 8,700 | 8,755 | 7,431 |
The decrease in total sales, net income, earnings per share, total assets and liabilities in 2023 as compared to 2022 was driven by less favorable market dynamics compared to the prior year. Growth in total sales, net income, earnings per share, total assets and non-current financial liabilities between 2022 and 2021 was primarily attributable to the addition of acquired businesses, as well as organic growth during this period.
5.1 Cash Flows from Operating, Investing and Financing Activities
Selected Unaudited Consolidated Financial Information (in thousands of US dollars, except per share amounts)
| Year ended December 31 |
Three months ended December 31 |
|---|---|
| $ 118,191$ 182,650 $ (64,459) 119,888 28,035 91,853 Cash provided by operating activities before changes in non-cash working capital Changes in non-cash working capital 2023 2022 $ change |
$ 37,597 $ 21,701 $ 15,896 18,855 105,473 (86,618) 2023 2022 $ change |
| 238,079 210,685 27,394 (13,481) (279,470) 265,989 (285,990) 128,608 (414,598) Net cash provided by operating activities Net cash (used in) provided by investing activities Net cash (used in) provided by fnancing activities |
56,452 127,174 (70,722) (1,216) 3,375 (4,591) (55,066) (72,525) 17,459 |
| (61,392) 59,823 (121,215) 65,068 7,762 57,306 (33) (2,517) 2,484 (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Foreign exchange loss on cash position held in a foreign currency |
170 58,024 (57,854) 3,734 9,180 (5,446) (261) (2,136) 1,875 |
| $ 3,643$ 65,068 $ (61,425) Cash and cash equivalents, end of the period |
$ 3,643 $ 65,068 $ (61,425) |
partially offset by a $15.9 million increase in cash provided by operating activities before changes in noncash working capital. The increase in cash provided by operating activities before changes in non-cash working capital was primarily driven by lower income taxes paid, partially offset by lower net income.
Net cash provided by operating activities
For the year ended December 31, 2023, cash flow provided by operating activities grew to $238.1 million, from $210.7 million in the same period last year. This $27.4 million increase primarily reflects $91.9 million in additional cash generated as a result of the year-over-year reduction in non-cash working capital (see section 5.2 for further details). This was partially offset by a $64.5 million decrease in cash provided by operating activities before changes in non-cash working capital, which primarily relates to lower net income, partially offset by the reduction in income taxes paid.
Net cash (used in) provided by
investing activities
For the year ended December 31, 2023, net cash used for investing activities decreased by $266.0 million to $13.5 million. This primarily reflects acquisition activity in 2022 (Mid-Am acquisition), which did not repeat in 2023.
For the three months ended December 31, 2023, net cash used in investing activities was $1.2 million, a net change of $4.6 million from $3.4 million provided by investing activities in Q4 2022. The year over-year change primarily relates to more cash invested in short-term investments.
For the three months ended December 31, 2023, cash flow provided by operating activities was $56.5 million, as compared to $127.2 million in the same period last year, a decrease of $70.7 million. This was comprised of an increase in non-cash working capital of $86.6 million (see section 5.2 for further details),
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Net cash (used in) provided by financing activities
For the year ended December 31, 2023, net cash used in financing activities was $286.0 million, compared to net cash provided by financing activities of $128.6 million in 2022, a change of $414.6 million. This primarily reflects repayments of bank indebtedness in 2023, compared to the use of bank financing in 2022.
For the three months ended December 31, 2023, net cash used in financing activities was $55.1 million, as compared to $72.5 million in the prior-year period. The $17.5 million decrease primarily reflects a $10.0 million decrease in common share repurchases and lesser repayments of long-term bank indebtedness compared to the same period in 2022
5.2 Working Capital
(in thousands of US dollars)
| Years ended | December 31 | Three months ended December 31 | Three months ended December 31 | |
|---|---|---|---|---|
| Source (use) of funds | 2023 | 2022 | 2023 | 2022 |
| Accounts receivable | (248) | 15,576 | 19,795 | 42,671 |
| Inventories | 120,823 | 6,125 | 29,903 | 81,823 |
| Prepaid expenses | 237 | 15,583 | (1,944) | 15,119 |
| Accounts payable and accrued liabilities | (924) | (9,249) | (28,899) | (34,140) |
| Change in non-cash operating working capital | 119,888 | 28,035 | 18,855 | 105,473 |
Our investment in working capital may fluctuate from quarter-to-quarter based on factors such as sales demand, strategic purchasing decisions taken by management, and the timing of collections from customers. Historically, the first and fourth quarters can be seasonally slower periods for construction activity, resulting in reduced demand for architectural building products.
Our business requires an ongoing investment in working capital which we consider to be comprised of accounts receivable, inventory, and prepaid expenses, partially offset by short-term credit provided by suppliers in the form of accounts payable and accrued liabilities. For the year ended December 31, 2023, working capital provided cash of $119.9 million, as compared to $28.0 million in 2022. The 2023 result reflects a $120.8 million reduction in inventory, representing a 25.0% decrease in our inventory position from the beginning of the year.
Continued compliance with financial covenants under our credit facility is important to ensure that we have adequate financing available to meet our working capital requirements. The terms of our credit facility are addressed in section 5.3 of this report.
5.3 Revolving Credit Facilities and Debt Management Strategy
Selected unaudited consolidated financial information (in millions of US dollars)
Selected Unaudited Consolidated Financial Information (in thousands of US dollars, except percentages and ratios)
| As at | As at | |
|---|---|---|
| December 31 | December 31 | |
| 2023 | 2022 | |
| Cash | $ (3,643) | $ (65,068) |
| Bank indebtedness | 392,396 | 616,290 |
| Net bank debt | 388,753 | 551,222 |
| Shareholders' equity | 526,867 | 506,972 |
| Capitalization | $ 915,620 | $ 1,058,194 |
| Net debt to capitalization | 42% | 52% |
| Previous 12 months Adjusted | ||
| EBITDA | $ 185,242 | $ 267,939 |
| Rental payments related to | ||
| warehousing and trucks | (42,025) | (37,951) |
| Previous 12 months Adjusted | ||
| EBITDA after rent | 143,217 | 229,988 |
| Net debt to previous 12 | ||
| months Adjusted EBITDA | ||
| after rent ("Leverage Ratio") | 2.7 | 2.4 |
| Committed | Committed | Drawn |
|---|---|---|
| Revolving credit commitment | $ 500.0 | $33.7 |
| Term commitment | $ 356.3 | $356.3 |
| Total | $ 856.3 | $390.0 |
| Financial covenants include: | ||
| Consolidated interest coverage ratio | 2.25:1 | |
| Consolidated leverage ratio | 4.00:1 |
The Credit Facility bears interest at a rate equal to the secured overnight financing rate (SOFR) plus up to 2.25% or the base rate of interest charged by the Lender from time to time, plus up to 1.25%. The SOFR and base rate margins for the Credit Facility are subject to performance pricing adjustments, from time to time, based on our then applicable leverage ratio.
The financial covenants under the Credit Facility include, among others: (i) a consolidated interest coverage ratio (a ratio of Adjusted EBITDA to total interest expense, determined on a consolidated basis of the Company), and (ii) a consolidated leverage ratio (a ratio of total funded debt to Adjusted EBITDA, determined on a consolidated basis of the Company). In determining the consolidated leverage ratio for financial covenant purposes, total funded debt is the aggregate of bank indebtedness, outstanding letters of credit, and lease obligations. Adjusted EBITDA is reduced for cash payments related to LTIP vesting and interest charges related to certain factoring arrangements.
We consider our capital to be debt (net of cash) and shareholders' equity. As at December 31, 2023, our overall net debt compared to total capitalization stood at 42%, as compared to 52% at December 31, 2022. As at December 31, 2023, our ratio of net debt-to Adjusted-EBITDA after rent, or Leverage Ratio, was 2.7 times.
In connection with the closing of the Mid-Am acquisition, certain of our subsidiaries amended the existing credit arrangement with Bank of America, N.A. and a syndicate of lenders (the "Lender'"). The Credit Facility consists of (i) a revolving credit facility of up to $500 million with a maturity date of July 2026, (ii) and a term loan of $400 million with an amortizing balance and maturity date of July 2026. A summary of the Credit Facility as at December 31, 2023 is provided in the following table.
Effective May 9, 2023, we amended the Credit Facility to exclude potential duties paid or payable relating to the import of hardwood plywood from Vietnam (as further described in section 8.0). In addition, and as a risk mitigation strategy, we also amended the interest coverage ratio to 2.25:1 from 3.00:1 for the quarters ending June 30, 2023 through to March 31, 2024.
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In addition to the financial covenants, our ability to pay dividends, complete acquisitions, make additional investments, take on additional indebtedness, allow our assets to become subject to liens, complete affiliate transactions and make capital expenditures are limited and subject to the satisfaction of certain conditions. The Credit Facility can be prepaid at any time, with no prepayment penalty.
Our debt management strategy is to repay a portion of our credit facilities related to acquisitions, and maintain a base level of debt as part of our capital structure. Our intent is to roll and renew our credit facilities when they expire. We do not intend to restrict future dividends in order to fully extinguish our debt obligations upon their maturity. The amount of debt that will actually be drawn on our available revolving credit facilities will depend upon the seasonal and cyclical needs of the business and our cash generating capacity going forward. When making future dividend and share repurchase decisions, we will consider the amount of financial leverage, and therefore debt, we believe is appropriate given existing and expected market conditions and available business opportunities. We do not target a specific financial leverage amount. We believe our current credit facilities are sufficient to finance our working capital needs and market expansion strategy.
5.4 Contractual Obligations
There were no significant changes in our contractual commitments outside the normal course of business.
5.5 Off-Balance Sheet Arrangements
On July 11, 2023, we entered into an interest rate swap with a notional value of $200 million to partially offset the variability in the expected interest cash flows related to the Term A-1 Loan. The fixed rate provided to us by the interest rate swap is approximately 120 basis less than the variable borrowing rate as at December 31, 2023. We have adopted IFRS 9 Financial Instruments ("IFRS 9") hedge accounting principles, accordingly the effective portion of any gains or losses related to the mark to market of the interest rate swap are recorded in other comprehensive income and the
ineffective portion of any gains or losses are recorded in net income. Our interest rate swap was deemed effective in accordance with IFRS 9 as at December 31, 2023.
5.6 Financial Instruments
Financial assets include cash and cash equivalents, current and non-current receivables, and income taxes receivables, which are measured at amortized cost, and investments are measured at fair value. Financial liabilities include bank indebtedness, accounts payable and accrued liabilities, income taxes payable, dividend payable, notes payable and finance lease obligations which are measured at amortized cost. Interest rate swap liability is measured at fair value.
The carrying values of our cash and cash equivalents, current accounts receivable, income taxes payable, accounts payable, accrued liabilities, and dividends payable approximate their fair values due to the relatively short period to maturity of the instruments. The fair value of non-current receivables, notes payable, other liabilities and finance lease obligations are not expected to differ materially from carrying value given the interest rates being charged and term to maturity. The carrying values of the credit facilities approximate their fair values due to the existence of floating market-based interest rates. In determining the fair value of our interest rate swap, we use the present value of expected cash flows based on the mark to market observable interest rate yield curves commensurate with the terms of the financial instrument.
5.7 Share Data
As at March 15, 2024, we had 22,431,342 common shares issued and outstanding.
On December 29, 2022, we announced a notice to renew the normal course issuer bid ("NCIB") to provide us with the option to purchase up to a maximum of 1,735,401 of our common shares during the period from January 3, 2023 to December 31, 2023. During the year ended December 31, 2023, we repurchased 421,811 shares for a total purchase price of $9.2 million under this renewed NCIB.
On December 28, 2023, we announced a notice to renew the NCIB to provide us with the option to purchase up to a maximum of 1,702,309 of our common shares during the period from January 2, 2024 to December 31, 2024 through the facilities of the TSX and on alternative trading systems in accordance with the requirements of the TSX. The purpose of the purchase of common shares under the NCIB is to enable us to acquire shares for cancellation. The maximum number of shares that may be purchased under the current NCIB represents approximately 10% of our Public Float (as defined in the policies of the TSX) as at December 19, 2023.
In addition, at March 15, 2024, we had outstanding 228,045 performance shares units and 243,633 restricted share units under the terms of our long-term incentive plan. The performance and restricted share units can be settled in common shares of the Company issued from treasury, common shares purchased by us in the market, or in an amount of cash equal to the fair value of our common shares, or any combination of the foregoing. Each restricted share unit is settled for one common share and each performance share unit is settled for between nil and two common shares, depending upon the applicable payout multiplier. The restricted and performance share units vest over periods of up to three years and employees have the option, when the restricted and performance share units vest, to receive up to half the fair value in cash and the remainder in common shares. We intend to issue common shares from treasury to settle the portion of the obligation not paid to employees in cash.
5.8 Dividends
In the fourth quarter of 2023, we declared a quarterly dividend of C$0.14 per common share, which was paid on January 26, 2024 to shareholders of record as of January 15, 2024. On March 15, 2024, we declared a quarterly dividend of C$0.14 per common share, payable on April 26, 2024 to shareholders of record as at April 15, 2024.
6.0 Related-Party Transactions
There were no material related-party transactions during the years ended December 31, 2023 and December 31, 2022.
7.0 Critical Accounting Estimates & Adoption of Changes in Accounting Policies
The preparation of financial statements in accordance with IFRS requires that we make estimates and assumptions that can have a material impact on our results of operations as reported on a periodic basis. We base our estimates and assumptions on past experience and other factors that are deemed reasonable under the circumstances. Actual results could differ from these estimates. The critical estimates used in preparing our financial statements are:
Leases: We are required to make estimates and assumptions related to leases, including the discount rates used for each lease, determining the lease term, and consideration of lease renewal options.
Goodwill impairment testing: We are required to make estimates and assumptions related to the annual goodwill impairment test, including the cash generating unit ("CGU") to which goodwill relates, the recoverable amount of a CGU, gross profit percentage, and the discount rates. The value assigned to these factors is based on management's estimate of future trends and is based on historical data from both internal and external sources.
Accounts receivable provision: Due to the nature of
our business and the credit terms we provide to our customers, we anticipate that a certain portion of required customer payments will not be made, and we maintain an allowance for these doubtful accounts. The allowance is based on our estimate of the potential of recovering our accounts receivable, and incorporates current and expected collection trends.
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Business acquisitions: We are required to make estimates and assumptions related to the fair value of assets acquired and liabilities assumed in business acquisitions. In 2022 we made estimates in respect to the Mid-Am acquisition.
Valuation of inventory: We are required to make estimates and assumptions regarding the net realizable value of our inventory. The estimates and assumptions may have a material impact on the values at which we recognize inventory.
Interest rate swap: We are required to make estimates and assumptions regarding the valuation and effectiveness of our interest rate swap. The estimates and assumptions may have a material impact on the values recognized in other comprehensive income for the effective portion, net income for the ineffective portion, and the carrying amount of the financial instrument.
We adopted Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) from January 1. 2023. Although the amendments did not result in any changes to the accounting policies themselves, they impacted the accounting policy information disclosed in the financial statements. The amendments require the disclosure of "material", rather than "significant", accounting policies. The amendments also provide guidance on the application of materiality to disclosure of accounting policies, assisting entities to provide useful, entityspecific accounting policy information that users need to understand other information in the financial statements.
8.0 Risks and Uncertainties
On July 14, 2023, the US Department of Commerce ("Commerce") issued its final determination ("Final Determination") with respect to certain hardwood plywood products produced in Vietnam that they believe are circumventing a previously established anti dumping and countervailing duty order against hardwood plywood from China (the "Circumventing Products").
As a result of the Final Determination, the Company estimates the value of products it imported from Vietnam subject to potential duties is approximately $7.6 million. The duty rate in this trade case is 206%, which will be applied against the $7.6 million of imports from Vietnam. With the issuance of this Final Determination, the Company accrued duties of $15.5 million and recorded the related impact for administration expense for the year ended December 31, 2023.
The Circumventing Products are specifically defined by Commerce and the Company believes that the products it imports from Vietnam do not meet Commerce's definition of Circumventing Products, and should therefore not be subject to duties. There are well established legal avenues to appeal Commerce's Final Determination and the Company intends to vigorously pursue recovery of any duties paid. The appeal process is typically a multi-year procedure however and the timing and ultimate outcome of the Company's efforts is not estimable at this time.
Subsequent to December 31, 2023 the Company received notices to pay duties of $18.1 million. This includes some notices related to imports that the Company believes are outside the scope of the Final Determination. The Company is challenging these out of scope notices.
We are exposed to a number of risks and uncertainties in the normal course of business that could have a negative effect on our financial condition or results of operations. We identify significant risks that we were aware of in our Annual Information Form, which is available to readers along with other disclosure documents at www.sedarplus.ca.
9.0 Internal Control over
Financial Reporting
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures ("DC&P") and internal control over financial reporting ("ICFR"). Any systems of DC&P and ICFR, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to information required to be disclosed and financial statement preparation and presentation.
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, we carried out an evaluation of the effectiveness of our DC&P as of December 31, 2023. The evaluation was carried out under the supervision of, and with the participation of, the CEO and CFO. Based on this evaluation, our CEO and CFO concluded that our DC&P were effective as of December 31, 2023.
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, we carried out an evaluation of the effectiveness of our ICFR as of December 31, 2023. The evaluation was carried out within the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework (2013) and under the supervision of, and with the participation of, our CEO and the CFO. Based on this evaluation, our CEO and CFO concluded that
our ICFR was effective as of December 31, 2023.
There have not been any changes in our ICFR during the year ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our ICFR.
10.0 Note Regarding Forward Looking Information
Certain statements in this MD&A contain forward looking information within the meaning of applicable securities laws in Canada ("forward looking information"). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward looking information, although not all forward looking information contains these identifying words.
Forward-looking information is included, but not limited to: We ended the year with significant unused borrowing capacity, which will enable us to continue
to manage short-term economic headwinds, fund anticipated future growth and continue executing on our strategies; our capital allocation priorities going forward will include a continued focus on repayment of debt and growth through acquisitions; the inflation and interest rate hikes of recent years are expected to continue to moderately impact economic activity; while our sales volumes have stabilized in recent quarters, we continue to experience softness in product pricing; forecasters are anticipating a stable environment for residential construction in 2024 and a flat-to-lower year for the repair and remodel market; we expect first quarter 2024 sales to be lower than the same period in 2023, with higher volumes being offset by weaker product prices year-over-year; sales comparisons to 2023 are expected to improve in the latter half of the year; in this environment, we anticipate modest growth in 2024 Adjusted EBITDA, driven by continued gross margin strength and disciplined management of operating expenses; as we have demonstrated in previous business cycles and most recently in 2023, we are adept at managing our business an cash flows effectively in challenging market conditions; our size and scale, together with the diversity in our product categories, customer channels and end-markets, provide important stability while reducing our exposure to any one geography or segment of the industry; our strong balance sheet provides financial stability as we move through periods of changing market conditions, and our business model is expected to continue converting a high proportion of EBITDA to operating cash flows before changes in working capital; in addition, our investment in working capital typically decreases during periods of reduced activity, resulting in an additional source of cash; over the longer term our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock; forecasters are also anticipating potential interest rate cuts in the later half of 2024, which could further support end-market demand for our products; we continue to see a multiyear runway for growth in the repair and remodel, residential, and commercial markets we participate in; we also do not expect the market to grow meaningfully in 2024; our business requires an ongoing investment in working capital; our investment in working capital may fluctuate from quarter-to-quarter based on factors such as sales demand, strategic purchasing decisions taken by management, and the timing of
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collections from customers; historically, the first and fourth quarters can be seasonally slower periods for construction activity, resulting in reduced demand for architectural building products; our debt management strategy is to repay a portion of our credit facilities related to acquisitions, and maintain a base level of debt as part of our capital structure; our intent is to roll and renew our credit facilities when they expire; we do not intend to restrict future dividends in order to fully extinguish our debt obligations upon their maturity; the amount of debt that will actually be drawn on our available revolving credit facilities will depend upon the seasonal and cyclical needs of the business and our cash generating capacity going forward; when making future dividend and share repurchase decisions, we will consider the amount of financial leverage, and therefore debt, we believe is appropiate given existing and expected market conditions and available business opportunities; we do not target a specific financial leverage amount; we believe our current credit facilities are sufficient to finance our working capital needs and market expansion strategy; and we intend to issue common shares from treasury to settle the portion of the obligation not paid to employees in cash.
The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: there are no material exchange rate fluctuations between the Canadian and US dollar that affect our performance; the general state of the economy does not worsen; we do not lose any key personnel; there is no labor shortage across multiple, geographic locations; there are no circumstances, of which we are aware that could lead to the company incurring costs for environmental remediation; there are no decreases in the supply of, demand for, or market values of our products that harm our business; we do not incur material losses related to credit provided to our customers; our products are not subjected to negative trade outcomes; we are able to sustain our level of sales and earnings margins; we are abIe to grow our business long term and to manage our growth; we are able to integrate acquired businesses; there is no new competition in our markets that leads to reduced revenues and profitability; we can comply with existing regulations and will not become subject to more stringent regulations; no material
product liability claims; importation of components or other innovative products does not increase and replace products manufactured in North America; our management information systems upon which we are dependent are not impaired; we are not adversely impacted by disruptive technologies; an outbreak or escalation of a contagious disease does not adversely affect our business; and, our insurance is sufficient to cover losses that may occur as a result of our operations.
The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. The factors which could cause results to differ from current expectations include, but are not limited to: exchange rate fluctuations between the Canadian and US dollar could affect our performance; our results are dependent upon the general state of the economy; the impacts of COVID-19, further mutations thereof or other outbreaks of disease, could have significant impacts on our business; we depend on key personnel, the loss of which could harm our business; a labour shortage across multiple geographic locations could harm our business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm our business; we may incur losses related to credit provided to our customers; our products may be subject to negative trade outcomes; we may not be able to sustain our level of sales or earnings margins; we may be unable to grow our business long term or to manage any growth; we are unable to integrate acquired businesses; competition in our markets may lead to reduced revenues and profitability; we may fail to comply with existing regulations or become subject to more stringent regulations; product liability claims could affect our revenues, profitability and reputation; importation of components or other innovative products may increase, and replace products manufactured in North America; disruptive technologies could lead to reduced revenues or a change in our business model; we are dependent upon our management information systems; disruptive technologies could lead to reduced revenues or a change in our business model; our information systems are subject to cyber securities risks; our insurance may be insufficient to cover losses that may occur as a result of our operations; an
outbreak or escalation of a contagious disease may adversely affect our business; our credit facility affects our liquidity, contains restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by us and certain of our subsidiaries; the market price of our Shares will fluctuate; there is a possibility of dilution of existing Shareholders; and, other risks described in our Annual Information Form, our Information Circular and in this MD&A.
11.0 Third Party Information
Certain information contained in this MD&A includes market and industry data that has been obtained from or is based upon estimates derived from third party sources, including industry publications, reports and websites. Although the data is believed to be reliable, we have not independently verified the accuracy, currency or completeness of any of the information from third-party sources referred to in this MD&A or ascertained from the underlying economic assumptions relied upon by such sources. We hereby disclaim any responsibility or liability whatsoever in respect of any third-party sources of market and industry data or information.
This MD&A contains information that may constitute a "financial outlook" within the meaning of applicable securities laws. The financial outlook has been approved by our management as of the date of this MD&A. The financial outlook is provided for the purpose of providing readers with an understanding of our anticipated financial performance. Readers are cautioned that the information contained in the financial outlook may not be appropriate for other purposes.
All forward-looking information in this MD&A is qualified in its entirety by this cautionary statement and, except as may be required by law, we undertake no obligation to revise or update any forward -looking information as a result of new information, future events or otherwise after the date hereof.
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