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Good morning. My name is Virgil, and I will be your conference operator today. At this time, I would like to welcome everyone to the HDI First Quarter Results Conference Call [Operator Instructions] Thank you. Mr. Rob Brown, you may begin your conference.
Thank you, Virgil, and good morning. Welcome, everybody. Thanks for joining us. I'm going to start this morning with a brief overview of our first quarter. Faiz Karmally, our CFO, will follow with a more detailed financial review, and then I'll return and discuss our outlook. I'm pleased to report that 2018 is off to a good start. Our U.S. operations achieved strong sales growth of 9.6% compared to the same period last year. This performance was comprised of organic growth of 5.6% and acquisitions-based growth of 4%. As it relates to our Canadian operations, sales were up 2.6% year-over-year and would have been higher except that there was 1 fewer selling day in Canada this quarter due to Good Friday falling in March this year rather than April. Adjusting for this on a sales-per-day basis, sales in Canada were up by 4.4% year-over-year. Organic growth was a key factor in our sales gains. We benefited from a healthy level of demand in our key markets, and prices for some of our products improved. Our results were further supported by a full quarter of operations from Downes & Reader Hardwood Company and Eagle Plywood and Lumber. We acquired these 2 businesses in 2017, and both are performing well. I'm pleased to report that we also achieved bottom line growth in the first quarter of 2018 with adjusted profit increasing 5%, adjusted profit per share increasing 5.4% year-over-year. This was a significant achievement, given that, as expected, our gross margin experienced some compression due to trade action in the U.S. that impacts a portion of our sales mix. The trade case relates to the combined 206% countervailing and antidumping duties that the U.S. imposed on imported Chinese hardwood plywood in 2017. This duty has rendered Chinese hardwood plywood uncompetitive in the U.S. and has caused us to adjust our supply line to different sourcing options. We estimate that the trade case negatively affected our first quarter gross profit by $1.2 million and our adjusted profit by $0.9 million.We were also contending with a stronger Canadian dollar during this quarter, which reduced adjusted profit by a further $0.4 million. So achieving a 5% increase in adjusted profit was a positive development in this environment. The recent reduction in the U.S. corporate tax rate certainly played a role in this as did our continued careful management of the business. And I'm pleased to say that as we move forward, those trade case impacts should start to lessen, which should further enhance our results. I'll talk more about that in just a few minutes, but first, I'll ask Faiz to review our first quarter financial results with you in some more detail. Faiz?
Thank you, Rob, and good morning, everyone. I'm going to provide a general overview of our results for the first quarter, and then I'll provide some comments on our financial position. Starting with revenue. First quarter sales increased 4.4% to $270.8 million. That's a gain of $11.5 million compared to last year, and it breaks down as follows:. Organic growth contributed $13.6 million to sales or 5.2%, and the addition of Eagle Plywood and Lumber and Downes & Reader Hardwood Company accounted for $8.5 million of the year-over-year increase. These gains were partially offset by the $10.6 million negative foreign exchange impact of a stronger Canadian dollar.In our U.S. operations, first quarter sales were up by USD 16.3 million or 9.6%, with organic growth in the U.S. accounting for USD 9.6 million of the year-over-year sales increase and acquired businesses contributing USD 6.7 million of the growth. In our Canadian operations, sales increased by $0.9 million or 2.6% despite 1 fewer selling day in Q1 of 2018. On a sales-per-day basis, sales in Canada increased by 4.4% year-over-year. On a consolidated basis, first quarter gross profit grew by 0.9% to $48.7 million. This increase reflects the higher sales, partially offset by a lower gross profit margin, primarily related to the trade case. As a percentage of sales, our gross profit margin was 18% compared to 18.6% last year. Without the impact of the trade case, we estimate that our gross margin would have been 45 basis points higher in the first quarter.Operating expenses were up year-over-year, primarily reflecting expenses from the acquired businesses and costs incurred to support organic growth. And as a percentage of sales, operating expenses were lower year-over-year at 13.8% of sales compared to 13.9% last year.Turning to adjusted EBITDA. This was $13.2 million in the first quarter, down from $14 million last year. Adjusted EBITDA was reduced this quarter by $1.2 million and $0.6 million related to the trade case impact and the impact of a stronger Canadian dollar, respectively.Our income tax expense decreased to $2.5 million from $3.8 million in the same period last year. This was primarily driven by lower taxable income and the lower federal corporate tax rate in the U.S., which is now 21% as compared to 35% previously. And adjusted profit increased by 5% to $8.3 million or adjusted diluted profit per share of $0.39. Adjusted profit benefited from the lower U.S. tax rate, which offset the trade case impact in the quarter. Turning now to our financial position. In the quarter, we made investments in inventory related to certain product lines to secure supplies. Our receivables at quarter end also include $3.5 million of refundable deposits paid to customs relating to certain import inventory.Even with these investments, our net debt-to-EBITDA ratio was a conservative 2.1x, and our debt-to-capital ratio was just 31.2%. We also had $66.8 million of unused debt capacity available. Going forward, we're well positioned to pursue our strategies, fund growth and support our dividend.Now I'll turn the call back to Rob.
Great. Thanks, Faiz. Our outlook for 2018 remains positive on the market front. We're anticipating low to mid-single-digit organic growth for our end markets and products. And our intention is to not only capture that market growth but build on it through the successful implementation and execution of our own strategies.Another important objective for us in 2018 is to continue to provide the very best product offerings to our customers despite the market disruption from the trade case. We're making good progress as we work through with our domestic and overseas vendors to establish reliable alternative product solutions going forward. And we've clearly demonstrated that we can meet customer needs despite the disruption. We have suffered no significant loss of customers or market share as a result of the trade case. While we anticipate some continued margin pressure will be reflected in our results until about mid-2018, hardwood plywood prices are starting to strengthen, and we expect our ability to pass along cost increases to customers will improve as market supply tightens. We also expect that our profitability will continue to benefit from the lower U.S. corporate tax rate.Overall, we're encouraged by our prospects going forward and believe we're in an excellent position competitively. We're North America's #1 distribution company in our space, with 3 of the industry's best known, most respected distribution brands. We have significant depth in our senior management team. We're attracting the industry's best people across our operations. We believe we have become the leading choice of suppliers looking for a sophisticated North American-wide distribution engine. And as Faiz mentioned, we have a strong balance sheet to support our future growth.Our outlook's positive for the business. Business is in good shape as we move forward into 2018 here. With that, I'd like to thank you for your attention. I'm going to turn the call back to Virgil, the operator, to provide instructions for the Q&A period. Virgil?
[Operator Instructions] Your first question comes from Chris Keefe from Canaccord Genuity.
Just wondering if you guys could give a little extra color on your supply chain overseas. Have you guys got another supplier in place? Or any progress there since the last time?
Yes, I can expand on that a little bit. So our previous import program was quite China-dominant. And with that tap being shut off, we've had to cast our net quite a bit wider. The comment I would make is, you said, do we have another supplier? It's not -- certainly not a single-supplier strategy. We have multiple mills in play, and I would also describe it as a multi-country strategy. So while that takes some time to put together, what we like about it going forward is it also offers us a little bit more diversification from an import perspective than we had previously.
Okay. And so that would be your long-term strategy then, is to keep it multiple? Or is it your long-term goal to kind of get it back to being a dominant supplier again?
No. I think the practicality is driven a lot by fiber supply and productive capacity around the globe. China was a powerhouse. It was easy to go there and single source more from that country. You don't have that same productive capacity in one place in other countries. So de facto, you're going to end up in multiple places, and it's our -- not only our intention but just the practicality of building those supply lines, that it's going to probably look like that for us as well.
Okay, that's helpful. Great. And just my second one here. I'm just wondering about your M&A pipeline. Are you guys still seeing some large targets out there? Like, what's your strategy going forward now? Are you going to do more tuck-ins? Or are you looking for a large one to do? Or is that affected by what's out there?
Yes. We look at all the opportunities that are available. And I would describe our approach as fairly methodical. We've got a very detailed pipeline and list of targets that we work through over time. It's not bound by -- necessarily by size. So we look at small tuck-ins, certainly, because there's a lot of those in the market. There's a good number of mid-chunk businesses. So targets, we'll be doing between $10 million and, call it, $30 million in sales. And then there's -- yes, to your comment, there are still some larger ones out there, and we would always consider those as they come on the market. But there's many fewer of those.
Your next question comes from the line of Maggie MacDougall from Cormark.
So you guys had a tough comp in Canada in Q1 for top line growth, but you still had a pretty good result. And it sounds like when you highlighted the sales per day, you actually would have been stronger had the Easter timing just been similar to last year. So I'm wondering if you can speak to the areas of strength you're seeing in your Canadian business. If you're operating in line with or better than we have seen the overall market and what you think the drivers are going forward for that area.
Yes, good question. And like you, I wish we had perfect insight into what underlying market is overall. So it's a little bit more anecdotal. But I would say that we've actually had quite good strength across all of our businesses. We really go as far east as the Ontario border and then some business into Quebec. And kind of uniformly, we've had some good sales growth across the piece, some a little bit stronger than others. We continue to talk to our customers and find that they're busy, and they're servicing all sectors in the economy where it's either single or multifamily on the housing side. And also, we have a robust commercial business. So on balance, we were pretty pleased with the Q1, and you mentioned the tough comp. And the extra sales day would have brought that up to about a 4.4% sales growth. So we thought that, that was quite good, and hoping to continue that through the balance of the year.
Okay, great. And then switching on the U.S. businesses, also good organic growth in the quarter. There was little commentary in the MD&A around product strategy and how you're seeking to create a competitive edge so that you can hopefully grow ahead of what your market's growing. So just wondering if you could elaborate a little bit on how you're pursuing that strategy in terms of your efforts around product, marketing and also sales.
Sure. So I would probably break the -- that down into 2 product categories. One would be core wood products perspective. And we have deep history, as you know, in this segment and believe that we're a market leader. We think by continuing to build on our product knowledge, experts and our long-term industry relationships and some of the global sourcing advantage that we bring and just the really breadth of portfolio, that we can get points of growth that may be a little bit stronger than market. And the second product strategy is really around decorative surfaces, which we've talked about a little bit in the past. It's a very high-growth product segment, reflects some of the design trends and market preferences that we're seeing out there today. And we think we're probably a little bit under representative -- underrepresented relative to market in decorative surfaces from where we can be. So that's the other area of focus for us.
Okay. And is there much margin differential when you look at your legacy core business and the newer sort of decorative surface, things that are trending in the market today?
I wouldn't call out a significant difference. You can have stronger margins in the decorative surfaces on a -- just a product margin basis, but you also then need to factor in there's a little bit higher obsolescence because they're more fashion-oriented items. So you have to do more product write-downs as you go just as a normal course to keep the inventory up-to-date. So on a net basis, I would say they're similar.
Okay, great. And then just one final question for me, it's a bit of a broader question. We're seeing in a number of different industries commentary around cost inflation, particularly as it pertains to freight just because of where gas prices are and labor is tight. And so I'm wondering if you could speak to just what you're seeing in your business and if this is potentially on your radar as you move into the summer driving season, which tends to usually bring higher fuel prices.
It is, yes. And we run, in some cases, our own drivers. And in other cases, we use common carriers. But in both circumstances, if you're bearing higher fuel costs, that's going to come through into the chain, and our job will be to pass those on to customers as we go, collaboratively, which is how we always try to approach those things. So I think your comment is [ real ]. For those folks that are softwood experts on the call and are thinking about railcar rates and shortages, that's not really our issue. It's more centered around common carrier truck freight to deliver to customers, would be my comment. The other one I would maybe just mention is we're seeing pretty much full employment in the U.S. So labor markets being tighter, our response is we spend a lot of time, from a people perspective, just making sure we're attracting and retaining and developing the best people, keeping them under our roof.
Your next question comes from the line of Hamir Patel from CIBC Capital Markets.
Just following up on Maggie's question there on organic growth. Rob, can you speak to maybe what you're seeing in the U.S. between both residential and commercial? Any geographies that stand out? And kind of related to that, as you think about acquisitions, are there any geographies that you feel you're under penetrated in?
Sure. So yes, we're pretty pleased with the strength we saw in the U.S. You mentioned geographies and end markets. The other maybe split I would just mention would be we're starting to see some price appreciation as well. So that's going to be a component. It's not going to be all volume growth. There's going to be some appreciation of underlying pricing as well that's within that organic growth number. In terms of geographies and end markets, I would say, residential versus commercial, we're seeing good activity amongst both. I wouldn't point out a specific difference there that would be worth noting. And then in terms of geographies, we've generally got sales growth across most regions. I would say the U.S. Northeast, if you look at housing numbers, has been a little bit less robust. But past that, most folks are doing well on top line. Maybe the exception would be not all regions are feeling the trade case impact equally. It depends how deeply embedded the region was in that particular segment. So there can be some differences there.
Okay, great. That's helpful. And with respect to the product price inflation, I'm not sure if there's a hardwood-plywood benchmark. But any sense as to maybe how prices, through the quarter, how much they were up since the Chinese duties were put in place and maybe since the end of Q1, how much they've risen since?
Yes, you're right, there's not a published benchmark, unfortunately. And even on the hardwood lumber price index, which we watch, and I know you do as well, it's not a perfect proxy. The -- what I would say about pricing is that to the extent customers are looking at domestic hardwood-plywood alternatives to replace what they might have previously gotten from China, those producers are experiencing some significant price pressure in terms of log costs. You would know the softwood lumber market well, but a lot of those platforms are Doug Ford platforms. And so log costs and core costs are higher, glue; Maggie mentioned transportation. So we're seeing some of that upward pressure, but it can only go up as much as the market will bear. We mentioned earlier that -- or on previous calls, that quite a bit of product came in, was imported into North America in advance of the duties coming into place. So there's still the reality of working through that supply despite the fact that some of the production costs domestically may be rising.
Great. That's helpful. And maybe just a final question. In terms of the imports, which are the sort of countries that we would expect you're going to start sourcing from once those supply lines are opened up?
Yes -- no. The -- I'm going to give you maybe a little bit of a laundry list as opposed pointing out we're going here. But places that are going to probably fill the gap will be places like Vietnam, Cambodia, Indonesia, Malaysia, really that Southeast Asia part of the world; and anticipate probably a little bit out of South America as well.
Your next question comes from the line of Nick Corcoran from Acumen Capital.
I think most of my questions have been answered, but the one question I have is about the working capital build in the quarter. Can you just comment on the increase year-over-year and whether we should expect a similar working capital build in Q1 in future periods?
Yes. Sorry, Nick, what was the last part of your question, whether we can expect? I didn't catch the last part of your question there.
Just the working capital build is larger year-over-year. So I'm just wondering if we should expect it going forward just for when sorting out the model.
Yes. Okay, I got your question. So if you think about receivables and then comparing it to year-end, it's a couple of million bucks higher, and that's just going to be heading into our busy Q2, Q3 season. So to me, that's sort of a normal movement when you compare it to December or even quarter 1 of last year. On the inventory side, if you look at the movements there from year-end to the first quarter, and if you keep foreign exchange out of it like if you were to normalize for foreign exchange, that increases about, let's call it, $10 million, Nick. And of that, about half of that, again, I would classify as just normal year-over-year growth heading into busy season to support the business. And there's about -- so the other half, about $5 million, is going to be what we would -- what we called out in our MD&A as investments in certain products to secure supply. So that piece, we probably expect that to continue at least for the next quarter and maybe longer, just depends on what's happening in the market with some of these product lines and supply. So I suspect we'll be a little higher, as we were in Q1. And Q1, the way I've done the math is $5 million, $6 million higher between AR and inventory than normal heading into Q2 at least certainly. Does that answer your question, Nick?
Yes, it does. That's great.
[Operator Instructions] Your next question comes from Russell Stanley from Echelon Wealth Partners.
Just a follow-up question on the acquisition front. I know you just updated us back in March and you provided some color earlier. But just wondering if you -- probably have you seen any movement on the part of would-be sellers in terms of valuation? Are demands becoming any more or less reasonable or unreasonable, given the way the market's developed?
Yes, I wouldn't point out any material change. I mean, we just -- our approach will be we're going to talk to lots of folks, and it needs to be a win-win prospect that a potential seller feels good about. Often, we're trying to keep these folks working for us. And that just needs to make economic sense for us. So in this market environment, yes, we think there's still going to be reasonable transactions for us to have.
Great. And just a question to try to pin you down, but I guess the lingering margin pressure from the trade case, should we expect a full quarter impact in Q2? Or do you expect it to moderate, given you're halfway through the quarter already?
You're right, you're not going to pin me down, but I appreciate the effort. I mean, what we've said is that we think it's going to persist through first half of the year that we'll have these impacts. Where we're at on the scale of that, whether it's the full quarter or something less, I think we're just going to have to -- that remains to be -- to emerge.
There are no further questions at this time. I'll turn the call back over to the presenter.
Okay. Thanks, everybody, for joining us today. I appreciate the interest and questions. As always, if you've got follow-up questions or thoughts, Faiz and I answer the phone. So please do give us a call. We'll be happy to help you out.
Thank you. This concludes today's call, and you may now disconnect.