Hardwoods’ sales increasing with Rugby aquisition
Aug. 12, 2016 - Higher demand and strong sales to construction accounts are reasons behind Hardwoods Distribution Inc.'s increase in sales in the second quarter. The company reports that total sales increased by 9.5% to $157.0 million from $143.4 million in Q2 2015. Hardwoods' U.S. operations increased sales by 3.7% to $95.5 million (USD).
By Maria Church
Hardwoods’ acquisition of U.S.-based Rugby Architectural Building Products in July has positioned the company as the North American’s largest distributor of hardwood lumber, panel and interior architectural building materials.
“We achieved strong organic growth in the second quarter, including record Adjusted EBITDA, while laying the groundwork for significant future growth with our acquisition of Rugby Architectural Building Products,” President and CEO Robert Brown said in a news release. “Our second quarter results, which do not include a contribution from the Rugby operations as the transaction closed after the quarter end, were driven by successful execution of our ‘leverage import’ and ‘strengthen commercial’ business strategies, a different product mix, our ability to capitalize on product pricing opportunities, and by the benefits of a stronger US dollar.”
The acquisition of Rugby expands Hardwoods’ U.S. geographic footprint with the addition of 15 distribution facilities located in the Eastern U.S., and significantly increases its presence in the commercial market from approximately 20% of its sales total to approximately 35%. This provides Hardwoods with greater diversification of its sales mix. The move also diversifies the company’s customer and product concentration by adding 22,000 customers and 36,000 SKU’s of branded and unbranded products sourced from a network of over 800 suppliers, and positions it for future U.S. expansion and growth as Rugby has a robust acquisitions pipeline for future acquisitions.
The Rugby acquisition was financed by net proceeds from a recently completed bought deal share offering, a draw-down of the company’s amended U.S. credit facility, and the issuance of 563,542 common shares of Hardwoods to the sellers of Rugby.
On the market front, second quarter U.S. housing starts were relatively flat year-over-year based on information from the US Census Bureau, however, seasonally adjusted housing starts for the first half were up 9.0% to 1,156,000 year-over-year. This growth bodes well for demand later in 2016 as hardwood products are typically used 9-to-12 months after construction begins. In Canada, second quarter seasonally adjusted housing starts increased by 7.2% to 183,270 according to the Canada Housing and Mortgage Corporation.
Average hardwood lumber prices for the first six months of 2016, as measured by the Hardwood Review Kiln Dried Lumber Price Index, were down 4.0% compared to the same period in the prior year. Prices for panel products were generally stable year-over-year.
Cash provided by Hardwoods’ operating activities increased to $6.9 million in Q2 2016, from $2.1 million in the same period last year. The $4.8 million improvement resulted from careful management of the company’s balance sheet and the efficient growth of its business. Adjusted EBITDA as a percentage of revenue increased to 7.3% in the second quarter and 6.7% in the first half of 2016, from 6.5% and 6.1% respectively in the same periods last year, reflecting the efficient operating performance of the business.
“Disciplined operational and financial management continue to be key factors in Hardwoods’ positive performance,” said Mr. Brown. “With the addition of Rugby, we are moving forward as the North American leader in our industry with approximately $1 billion in combined annual sales, a coast-to-coast US presence and a much stronger position in the commercial market. We look forward to continued growth in our base businesses and adding to the scope of our operations by utilizing our continuing financial strength.”
With the addition of the Rugby operations effective July 15, 2016, the company’s geographic and end-market weighting will shift. Going forward, approximately 90% of Hardwoods’ sales will be transacted in the U.S. (compared to 75% previously) and approximately 35% of sales will be focused on the commercial market (up from 20% previously). While residential construction is expected to remain a key end-market for Hardwoods, it will represent approximately 50% of its business going forward, compared to 60% previously. Other markets such as home renovation, recreational vehicles, custom motor coaches, yacht interiors and other specialty areas are expected to comprise 15% of the company’s business going forward.
Hardwoods’ product mix will also expand with the addition of Rugby’s product offerings. These include a broad range of hardwood plywood, composite panels, solid surface countertops, post-form countertops, high-pressure laminate, interior and exterior doors and millwork, hardwood lumber, cabinet hardware, mouldings, sinks and faucets, and industrial wood coatings.
Hardwoods expects that its gross profit margin as a percentage of sales will increase, reflecting the higher margin product mix carried by Rugby. Operating expenses are also expected to be moderately higher, reflecting Rugby’s sales model which typically involves more orders to more customers, but with smaller average order sizes.
The outlook for Hardwoods’ primary end-markets remains positive for the balance of 2016 and into 2017. In the U.S., job growth and income levels are gaining momentum and are helping propel a continuing recovery in the residential construction market. In the non-residential construction market, the American Institute of Architects predicts US growth of 8.2% in 2016, with the strongest gains anticipated in the commercial markets that Hardwoods focuses on. Home improvement spending is also projected to pick up pace as housing markets continue their gradual recovery.
The outlook for the Canadian market remains neutral, with 2016 housing starts expected to remain consistent with 2015 levels and commercial construction expected to remain in line with inflation.
Industry forecasts predict hardwood lumber prices will generally remain soft through the balance of 2016 as increased supply works its way through the market and demand from export markets remains less predictable. Prices for hardwood plywood and composite panel products are expected to remain steady.
Strategically, Hardwoods will continue to implement its “leverage imports” and “strengthen commercial” strategies, while also capitalizing on the numerous opportunities created by the Rugby acquisition. Key areas of focus will include:
- growing sales of the company’s high-quality proprietary import lines, supported both by its established international quality assurance team and new international sourcing initiatives designed to bring world-wide product solutions to customers; and
- capitalizing on significant opportunities in the commercial market. In particular, Hardwoods continues to grow its supply of first-tier product supply for commercial customers. The company is also capitalizing on its import capabilities to offer commercial customers an attractive and differentiated line-up of products.
Going forward, the company will continue to pursue well-priced acquisition opportunities that support its strategies, taking advantage of the expanded range of opportunities provided by the Rugby acquisition. Rugby management has successfully completed and integrated 17 acquisitions since 2009, and has identified a pipeline for future acquisitions in the United States.
Hardwoods’ Board will continue to review financial performance and assess dividend levels on a regular basis. However, the primary focus in 2016 will be to retain the cash necessary to finance the significant market growth opportunity in the U.S. and to keep the balance sheet strong, reduce debt and support future strategic acquisitions.