Mr. Rob Brown reports

HDI ANNOUNCES SECOND QUARTER 2022 RESULTS

Hardwoods Distribution Inc. has released its financial results for the three and six months ended June 30, 2022. Hardwoods Distribution is one of North America's largest suppliers of specialty building products to fabricators, home centres and professionals dealers servicing the repair and remodel, residential, and commercial construction end-markets. The company currently operates a network of 86 facilities in the United States and Canada. All amounts are shown in United States dollars, unless otherwise noted.

Second quarter highlights:

• Second quarter sales grew 107.2 per cent to $700.3-million, a year-over-year increase of $362.2-million. Organic sales growth in Q2 was 23.1 per cent while acquisitions contributed an additional 84.7 per cent.
• Gross profit climbed 102.6 per cent or $77.9-million to $153.8-million, with gross profit margin percentage of 22.0 per cent, similar to 22.5 per cent in the same period last year.
• Profit per share increased significantly to $1.77, from $1.14 in Q2 2021, an increase of 54.9 per cent.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) climbed 78.6 per cent to $78.6-million, from $44.0-million during the same period in 2021.
• Cash flow from operating activities per share, before changes in working capital, increased by 25 cents in the second quarter to $1.79, from $1.54 in the same period last year.
• The board of directors declared a quarterly dividend of 12 Canadian cents per share, payable on Oct. 28, 2022, to shareholders of record as at Oct. 17, 2022.

"We delivered another quarter of outstanding financial performance as our growth strategy, proven business model and disciplined operating management, combined with favourable market conditions, helped us achieve record performance as total sales for the quarter climbed to $700.3-million," said Rob Brown, Hardwoods Distribution's president and chief executive officer. "Importantly, our performance enabled us to continue our returns to investors. Year to date, we have returned $12.8-million to shareholders through a combination of dividends and share repurchases.

"Our results reflect the positive impact of our new Mid-Am and Novo operations, acquired in Q3 2021 and Q1 2022, respectively. These businesses have brought us important scale, access to new geographies, and a strong presence in the U.S. pro dealer and home centre channels, and combined are expected to deliver approximately $1-billion in pro forma sales in 2022. We also achieved continued strong organic growth in the second quarter as consumer demand and product pricing remained resilient despite an environment of higher interest rates.

"On the market front, the North American repair and remodel market, which represents about 40 per cent of our sales, continues to show strength, supporting demand for our products. The residential construction market, which represents another 40 per cent of our business, also remained active as builders catch up the significant lag between housing starts and completions. With most of our products used in later stages of construction, we are benefiting from the elongated demand curve in this market.

"Going forward, we will continue to closely monitor economic conditions and the impacts that price inflation, rising interest rates and other factors can have on our business. We benefit from a highly experienced team with a long track record of successfully managing our operations and controlling costs through changing markets. We believe our business has the resilience to manage through these cycles, and we anticipate a multiyear runway for growth and value creation as we benefit from our leading market position and the long-term positive fundamentals underpinning the North American building products market," said Mr. Brown.

Outlook

Over the long term, the company expects demand for its products to remain resilient, supported by strong fundamentals in its end-markets. Hardwoods Distribution also continues to see a multiyear runway for growth in the repair and remodel, residential, and commercial end-markets that it participates in.

In the nearer term, rising inflation and recent interest rate hikes could have a negative impact on economic activity. As Hardwoods Distribution has demonstrated in previous cycles, the company will take all necessary actions required to effectively manage its business and cash flows. The company maintains a strong balance sheet, which provides financial stability through periods of changing market conditions. Hardwoods Distribution's business model also converts a high proportion of EBITDA to operating cash flow before changes in working capital and, during periods of reduced activity, the company's investment in working capital has historically decreased, resulting in an additional source of cash.

Outlook for Hardwoods Distribution's end-markets

The repair and remodel market (approximately 40 per cent of sales) is benefiting from current market trends. The increase in mortgage rates may effectively lock in current homeowners by offering a financial incentive to stay in existing homes that were financed at lower mortgage rates. At the same time, home equity per owner is at record levels and the median age of homes in the United States is over 40 years, helping to support strong levels of repair and remodelling activity. These trends are expected to be an important driver of multiyear demand for the company's products.

In the residential construction market (approximately 40 per cent of sales), new building starts are expected to moderate in the near term as affordability headwinds weigh on consumers. However, given that housing completions have not kept pace with starts over the past quarters, Hardwoods Distribution expects to see an elongated demand curve for its products, which are typically installed during the finishing stages of home construction. Over the longer term, leading indicators for the residential construction market remain highly favourable. Housing starts have meaningfully lagged population growth this past decade and it is estimated that the U.S. has a housing supply deficit of over 3.5 million units. This supply deficit, combined with positive demographic factors, are expected to underpin long-term demand for new housing.

The demand outlook for U.S. commercial markets (approximately 15 per cent of sales) is mixed, with some sectors showing strength and others recovering at a slower pace. Commercial market participation is highly diverse for Hardwoods Distribution and includes construction activity in health care, education, public buildings, hospitality, office, retail facilities and recreational vehicles. Hardwoods Distribution expects certain of these commercial end-markets will perform better than others, with the broad nature of the company's participation reducing the impact of dynamics in any one geography or end-market.

Q2 2022 investor call

Hardwoods Distribution will hold an investor call on Friday, Aug. 12, 2022, at 8 a.m. Pacific Time (11 a.m. Eastern Time). Participants should dial 1-800-304-0389 or 647-484-0258 (Greater Toronto Area) at least five minutes before the call begins. A replay will be available through Aug. 19, 2022, by calling toll-free 1-888-203-1112 or 647-436-0148 (GTA), followed by passcode 2912602.

Results from operations -- three months ended June 30, 2022

For the three months ended June 30, 2022, consolidated sales climbed to a record $700.3-million, an increase of $362.2-million or 107.2 per cent from $338.0-million in the same period in 2021. Organic sales growth accounted for $78.2-million of this gain, representing a 23.1-per-cent increase in consolidated sales. The Novo and Mid-Am businesses (acquired businesses) contributed an additional $201.7-million and $84.5-million of sales growth, respectively, representing a combined 84.7-per-cent increase in sales from the acquired businesses. The increase in revenue was partially offset by $2.1-million of unfavourable foreign exchange impact.

Second quarter sales from Hardwoods Distribution's U.S. operations grew to $645.9-million, an increase of $354.5-million or 121.7 per cent from $291.4-million in the same period in 2021. Organic sales growth accounted for $68.3-million of this improvement, representing a 23.5-per-cent increase in U.S. sales. The strong organic growth was primarily supported by robust market demand, which in turn contributed to improved product prices. The Novo and Mid-Am operations contributed an additional $286.2-million to second quarter U.S. sales growth, representing a 98.2-per-cent increase in U.S. sales.

In Canada, second quarter sales increased by $11.9-million (Canadian) or 20.6 per cent compared with the same period in 2021. The Canadian sales growth was entirely organic and reflects continued strong market demand, which has resulted in improved market prices for Hardwoods Distribution's products year over year.

Gross profit for the second quarter grew 102.6 per cent to $153.8-million from $75.9-million in the same quarter last year. This $77.9-million improvement reflects significant organic sales growth together with the addition of sales from the acquired businesses. Hardwoods Distribution's second quarter gross profit margin of 22.0 per cent was similar to the 22.5 per cent achieved in the same period last year.

For the three months ended June 30, 2022, operating expenses increased by $50.9-million to $92.9-million from $41.9-million in Q2 2021. As a percentage of sales, operating expenses were higher at 13.3 per cent, as compared with 12.4 per cent in the same period last year.

The $50.9-million increase in operating expenses includes $40.3-million related to the operations of the Novo and Mid-Am businesses, $8.4-million to support organic growth, and $4.9-million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $2.2-million of Novo-related transaction costs incurred in Q2 2021, which did not repeat in 2022.

For the three months ended June 30, 2022, depreciation and amortization increased to $16.5-million from $6.2-million in Q2 2021. This $10.3-million increase relates to the acquisition and operations of the Novo and Mid-Am businesses, and primarily comprises $4.9-million of amortization on acquired intangible assets and $5.2-million from depreciation related to operations.

For the three months ended June 30, 2022, net finance expense increased to $5.8-million from $1.4-million last year. The increase was primarily driven by a higher interest on bank indebtedness used to finance the acquisitions of Novo and Mid-Am, and higher interest rates.

For the three months ended June 30, 2022, income tax expense increased to $13.2-million from $8.3-million last year. This increase primarily reflects higher taxable income.

Second quarter adjusted EBITDA climbed 78.6 per cent to $78.6-million from $44.0-million during the same period in 2021. The $34.6-million improvement was driven primarily by the $77.9-million increase in gross profit, partially offset by the $43.3-million increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP (long-term incentive plan) expense, and transaction expenses).

Profit for the second quarter grew 72.4 per cent to $41.9-million from $24.3-million in Q2 2021. The $17.6-million improvement primarily reflects the $37.2-million increase in EBITDA, partially offset by a $10.3-million increase in depreciation and amortization, the $4.9-million increase in income tax expense, and the $4.3-million increase in net finance expense.

For the three months ended June 30, 2022, basic profit per share climbed 54.9 per cent to $1.77 from $1.14 in Q2 2021. Adjusted profit increased 56.6 per cent to $43.0-million from $27.4-million in Q2 2021 and adjusted diluted profit per share grew 40.6 per cent to $1.80 from $1.28 in the same period last year.

Results from operations -- six months ended June 30, 2022

For the six months ended June 30, 2022, consolidated sales climbed to $1.3-billion, an increase of $716.0-million or 113.8 per cent from $629.2-million in the same period in 2021. Organic sales growth accounted for $192.9-million of this gain, representing a 30.7-per-cent increase in consolidated sales. The Novo and Mid-Am businesses contributed an additional $394.6-million and $136.9-million of sales growth, respectively, representing a combined 84.5-per-cent increase in sales from the acquired businesses. These gains were partially offset by the first quarter 2021 divestiture of Hardwoods Distribution's HMI business, which resulted in $6.4-million of sales from the first half of 2021 not recurring in the current period. Foreign exchange fluctuations in the Canadian dollar also had an unfavourable $2.1-million impact on sales results.

First-half sales from Hardwoods Distribution's U.S. operations grew to $1.2-billion, a year-over-year increase of $693.5-million or 127.6 per cent from $543.7-million in the same period last year. Organic sales growth accounted for $168.3-million of this improvement, representing a 31.0-per-cent year-over-year increase in U.S. sales. The strong organic growth was primarily supported by robust market demand, which in turn contributed to improved product prices. The Novo and Mid-Am operations contributed an additional $531.6-million to first-half U.S. sales growth, representing a 97.8-per-cent increase in U.S. sales.

In Canada, sales for the first six months increased by $30.5-million (Canadian) or 28.5 per cent compared with the same period in 2021. The Canadian sales growth was entirely organic and reflects continued strong market demand, which has resulted in improved market prices for Hardwoods Distribution's products year over year.

Gross profit for the first half grew 125.4 per cent to $301.6-million from $133.8-million in the same period last year. This $167.8-million improvement reflects Hardwoods Distribution's significant organic and acquisition-based sales growth. At 22.4 per cent, Hardwoods Distribution's gross profit margin was higher than the 21.3 per cent the company achieved in the same period last year. The increase in gross profit percentage includes the impact of favourable changes in product mix and the successful execution of the company's internal strategies designed to improve gross margin percentage over time.

For the six months ended June 30, 2022, operating expenses were $177.6-million, as compared with $80.9-million in the same period last year, an increase of $96.8-million. As a percentage of sales, operating expenses were well controlled at 13.2 per cent, similar to 12.9 per cent in the first half of last year.

The $96.8-million increase in operating expenses includes $75.6-million related to the operations of Hardwoods Distribution's newly acquired Novo and Mid-Am businesses, $14.9-million to support organic growth, and $9.0-million of amortization on intangible assets acquired in connection with the Novo and Mid-Am acquisitions. These increases were partially offset by $1.3-million of Novo-related transaction costs incurred in the first half of 2021, which did not repeat in the 2022 period.

For the six months ended June 30, 2022, depreciation and amortization increased by $19.4-million to $31.7-million from $12.3-million in the prior-year period. This increase relates to the acquisition and operations of the Novo and Mid-Am businesses, and primarily comprises $9.0-million of amortization on acquired intangible assets and $10.3-million from depreciation related to operations.

For the six months ended June 30, 2022, net finance expense increased to $11.2-million from $2.9-million last year. The increase was primarily driven by a higher interest on bank indebtedness used to finance the acquisitions of Novo and Mid-Am.

For the six months ended June 30, 2022, income tax expense increased to $27.4-million from $12.8-million last year, primarily driven by a higher taxable income.

First-half 2022 adjusted EBITDA climbed 127.1 per cent to $158.4-million from $69.7-million in the same period of 2021. The $88.7-million improvement reflects the $167.8-million increase in gross profit, partially offset by the $79.1-million increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP expense, and transaction expenses).

Profit for the first six months grew 128.9 per cent to $85.4-million from $37.3-million in the first half of 2021. The $48.1-million profit improvement primarily reflects the $90.4-million increase in EBITDA, partially offset by a $19.4-million increase in depreciation and amortization, the $14.6-million increase in income tax expense, and the $8.3-million increase in net finance expense.

For the six months ended June 30, 2022, basic profit per share climbed 105.7 per cent to $3.60 from $1.75 in the same period last year. Adjusted profit increased 113.7 per cent to $87.7-million from $41.0-million in the first half of 2021 and adjusted diluted profit per share grew 93.7 per cent to $3.68 from $1.90 in the same period last year.

About Hardwoods Distribution Inc.

Hardwoods Distribution is one of North America's largest suppliers of specialty building products to fabricators, home centres and professional dealers servicing the new residential, repair and remodel, and commercial construction end-markets. The company currently operates a network in North America of 86 facilities in the United States and Canada. Hardwoods Distribution's common shares are listed on the Toronto Stock Exchange under the symbol HDI.

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