Good day, and welcome to HDI's fourth quarter and year-end 2021 results conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Ian Tharp. Please go ahead.
Thank you, Katie, and good morning to those joining today as we discuss HDI's financial results for the fourth quarter and full year of 2021. My name is Ian Tharp, investor relations for HDI, and joining me on the call today are Rob Brown, HDI's President and Chief Executive Officer, and Faiz Karmally, Vice President and Chief Financial Officer. HDI's Q4 earnings release, financial statements and MD&A are available on the investors section of HDI's website at www.hdidist.com. These statements have also been filed on HDI's profile on SEDAR at www.sedar.com. Before we start, I wanna remind listeners that during this call, management may make forward-looking statements. These statements involve various known and unknown risks and uncertainties and are based on management's current expectations and beliefs, which may prove to be incorrect. Actual results could differ materially from those described in these forward-looking statements.
Please refer to the text in HDI's earnings press release and financial filings issued today for a discussion of the risks and uncertainties associated with these forward-looking statements. Also note that all dollar figures referred to today are in U.S. dollars unless stated otherwise. I'd like to now turn the call over to Rob Brown. Rob?
Thanks, Ian, and good morning, everyone. I'm pleased to chat with you today as we report record-setting results for 2021. I'll start today with our key financial and business highlights for the year. Our CFO, Faiz Karmally, will then provide details of our Q4 financial results. I'll finish off today's prepared remarks with our outlook for 2022. 2021 was a remarkable year for HDI. Our record growth and outstanding financial performance during the year underscores the magnitude and the success of the transformation we've achieved in our business. Financially, we realized a significant milestone as total sales rose to a record $ 1.6 billion, which was 74% higher than the sales we generated in 2020. It also surpasses our previously stated goal of achieving sales of $ 1.5 billion by 2023, which we reached two years ahead of schedule.
Our bottom line results more than kept pace with our top line growth. Adjusted EBITDA for 2021 climbed 168% to $195.2 million, and profit per share grew 265% to $4.81, setting an all-time profitability record for the company. Those are outstanding achievements, and I want to, you know, thank every member of the HDI team for their contributions to our results. We've realized our goal of transforming HDI into a leading supplier of architectural building products that help our customers create beautiful finished spaces where we live, work and play. To speak more about HDI's transformation, I'll contrast it to just six years ago. At that time, our business was roughly one quarter the size it is today. We operated from 33 locations.
The customers we served were primarily industrial customers, and we generated annual sales of roughly $450 million across two product groups, hardwood lumber and hardwood plywood. HDI in 2016 was successful. However, we saw new opportunities to leverage our distribution and our product sourcing strengths to expand into higher margin architectural product offerings and to access a larger and more diverse customer base. Through our strategic focus on acquisitions, since 2016, we've successfully completed a total of 11 acquisitions. We closed our purchase of Novo Building Products, which was our largest acquisition to date, in July of 2021. Novo brought us over $670 million in pro forma annual sales and over $60 million in pro forma annual EBITDA.
Importantly, it filled a key strategic goal by giving us turnkey access to two large and very attractive new customer channels, DIY and home builder sales that go through home centers and pro dealers. With this access, we more than doubled HDI's addressable market. We've continued to execute on our business strategies since acquiring Novo. In December, we completed a successful CAD $ 100 million equity offering, which helped us finance our follow-on acquisition of Mid-Am Building Supply, which we then closed in February 2022. Mid-Am builds geographically on our acquisition of Novo by further expanding our reach into the pro dealer channels in the U.S. Midwest. It also brought us another $270 million of pro forma annual sales and attractive EBITDA margins. Our targeted and accretive acquisitions, plus our own organic growth strategies, have transformed HDI.
Our distribution network has grown from 33- 86 facilities today, and U.S. sales now represent 90% of total sales as compared to 70% in 2016. Our diversification has increased with over 75,000 customers now served through a more diverse set of customer channels, including industrial manufacturers, pro-dealers and home centers. Our product mix has evolved to include higher margin specialty architectural products. We now sell across eight broad product categories with no single product category representing more than 20% of our pro forma sales. We're generating exceptional financial results. Annual sales climbed from roughly $450 million in 2016 to $1.6 billion in 2021, and pro forma annual sales would have been over $2.2 billion with the addition of Novo and Mid-Am.
Our enhanced product mix has supported a significant improvement in our gross margin percentage, and our profit per share has increased from 2016 to 2021 at a compounded annual growth rate of over 37%. From a market perspective, in 2021, our team capitalized on the strong market environment. Our supply chain, which we view as a major competitive advantage, played a significant role by enabling us to access product in very tight supply conditions and respond to strong market demand. This in turn contributed to higher volumes and increased market prices for our products. Our operating performance in this environment has been exceptional as well and was a contributing factor leading to the increase in gross margin percentage year-on-year of almost 400 basis points. Operating expenses were well controlled across the organization, with expenses as a percentage of sales decreasing year-over-year.
The record performance in 2021 was the result of a combination of our strengths, an accretive and scale transaction, the resilience of our supply chain, the ability to leverage scale, a proven business model and very tight operational management. This performance translated into very good returns for shareholders. HDI's total shareholder return in 2021 was 79% outpacing the TSX index. It was an exceptional 2021 for HDI and our outlook is also very positive. I'll return later to speak about that in more detail, but now I'll pass the call to Faiz to review the Q4 financial results in more detail. Faiz?
Thanks, Rob, and good morning, everyone. I'm going to recap our financial results for the fourth quarter of 2021. I'll also outline our financial position at year-end. Again, I'll remind those listening that any dollar figures Rob and I use today are in U.S. dollars unless we state otherwise. Starting with consolidated revenue, we generated very strong sales of $515.4 million in Q4, which was an increase of 118% or $278.8 million from Q4 in 2020. Organic sales were strong and accounted for $95.5 million or 40.4% of the sales growth. Acquired businesses contributed $188.6 million or 79.8% of the increase in sales.
Our Novo acquisition accounted for $169.2 million of the increased sales in Q4. In our U.S. operations, Q4 sales were $470.7 million, which was 128% increase over the corresponding quarter in 2020. U.S.-based sales increased by $264.4 million, with organic sales growth accounting for $82.6 million or 40% of the sales growth, and acquired businesses accounted for $188.6 million of the total sales growth. Our Canadian operations were also strong contributors to our Q4 results. Q4 sales in Canada rose by $616.8 million, which was 42.7% gain compared to Q4 in 2020 and was entirely driven by organic growth.
Our success in delivering strong growth in our organic sales was supported by robust market demand, which drove higher unit volumes as well as higher product pricing. Turning to gross profit, this climbed 171% to $122.9 million in the fourth quarter. This significant increase reflects our strong sales results, the addition of Novo and a strong gross profit margin percentage of 23.8%. This continued gross margin percentage trend reflects a number of factors, including favorable market dynamics, changes in product mix, and the inclusion of our Novo business, which carries a slightly higher gross margin percentage. Our operating expenses for Q4 were $76.4 million or $14.8 million higher than the fourth quarter of 2020.
The primary drivers of the increase relate to acquired businesses and investments in the business to support our growth, which accounted for $34.3 million and $6.3 million of the increase, respectively. Looking at our operating expenses as a percentage of sales, it decreased to 14.8% in the fourth quarter of 2021 as compared to 15% in the fourth quarter last year. This reflects our focus on expense management throughout the business. Moving now to adjusted EBITDA. For Q4 2021, it climbed 232% year-over-year to $61.7 million. As a percentage of sales, our adjusted EBITDA margin was 12% for Q4, which was a substantial improvement on the 7.9% adjusted EBITDA margin posted for Q4 of 2020.
As a positive indicator of the operating leverage we're capturing as our business expands, Q4 profit grew at an even faster pace. Q4 profit of $32.1 million represented a 452% year-over-year growth rate as compared to the same period in the prior year. On a per share basis, profit climbed to $1.47, an increase of 425% over the $0.28 per share in Q4 of 2020. Turning now to our balance. We ended the fourth quarter in good financial position with a leverage ratio of 2.4 times. As you know, following year-end, we've made further announcements that impact our capital structure. Along with our acquisition of Mid-Am Building Supply, which closed in early February, we announced an upsizing of our existing credit facility to $900 million.
We're focused on the efficient use of our capital structure and our ability to support new growth initiatives that create further value for shareholders remains strong. Our priorities are focused on responsible management of our balance sheet, growth, both organically and through accretive acquisitions, and providing incremental total returns to shareholders through our dividends. With that, I'll turn the call back over to Rob.
Great. Thanks, Faiz. I'll finish our prepared comments this morning with our views on end markets and our strategy to continue to build the long-term value of HDI. From a demand perspective, our customers today continue to be very busy. In the U.S., which accounts for approximately 90% of our sales, the outlook for residential and repair and remodel construction remains highly positive. We continue to see a multiyear runway for growth driven by some important factors. For new homes, positive factors include housing starts remain elevated after meaningfully lagging population growth for a decade. Millennials, which are the largest segment of the population, are entering their peak home buying years, and mortgage rates and home equity levels support further investment in new homes. For the R&R market, positive factors include U.S. housing stock continues to age, and it's in need of either refurbishment or replacement.
Home equity levels are rising and lower cost consumer capital is available, and individuals are spending more time in and disposable income on their homes. These trends are supportive of a multi-year period of demand for our products. For commercial markets in the U.S., the outlook's more mixed. Our participation in the commercial markets is highly diverse, however, and it includes construction activity in healthcare, education, public buildings, hospitality, office, retail facilities, and recreational vehicles. The very broad nature of our involvement in the commercial market by both geography and end use has generally resulted in stable performance within this segment. On the supply front, we expect continued tightness. However, we are often the largest customer for our suppliers and generally expect to have access to product.
In addition, we believe that our global supply chain is best in class and should provide additional supply options for us as it did in 2021. We do acknowledge that the availability and predictability of freight in the market was disrupted in 2021, and this is expected to continue into 2022. As a significant importer, we believe we're well-positioned to access multiple freight options. We have dedicated internal resources that manage our freight logistics daily, and our strong balance sheet allows us to invest working capital to secure product and freight solutions that help us meet the needs of our customers. In 2021, we did not experience significant adverse effects from global freight challenges, which we believe shows the resilience of our business. I wanna wrap up my comments today by highlighting the growth and profitability our team has continued to deliver.
Importantly, we've achieved these results on an accretive basis and generated strong returns for shareholders. We continue to see new avenues to gain market share. We have organic growth options across our expanded business base and also through future acquisitions. We've proven our ability to successfully secure and integrate acquisitions, and our industry holds further potential on the M&A front. We maintain a capital or a flexible capital structure and have capacity to execute on our growth strategies going forward. At the close of this exceptional 2021 year, I am deeply proud of the transformation HDI has achieved and very excited about what we will do with our increased size, strength, and opportunities in 2022. With that, I wanna thank you for your time this morning. I would ask our operator, Katie, to please provide instructions for the Q&A period. Katie?
Thank you. If you would like to ask a question, you may signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star one for questions. We'll take our first question from Hamir Patel with CIBC Capital Markets.
Hi, good morning. Rob, I wanted to ask you about what the potential impact of the war in Ukraine could be. I believe Russia might be sort of 10% of the U.S. hardwood plywood market. You know, what impact do you expect that to have on, you know, your import strategy and product prices in the U.S. market?
Yeah, morning, Hamir. That 10% number, yeah, we're familiar with that. I've seen some numbers a little bit higher and a little bit lower than that, but I think that's a reasonable starting place. For our business, we do a little bit of product out of Russia. We suspended all sourcing of that product once the conflict began. We're currently on program suspension with Russia. This is not a material amount of volume for our company, and we believe we've got other sourcing solutions that we'll be able to bring to customers in terms of a solution for them to move off of that previous product offering that might have been available from that country, from us and others.
Okay, great. Thanks, Rob. That's helpful. Just, you know, I know there's been a lot of different price increases across the building product space, but for some of your product categories, especially in doors and stair parts where we don't have as much visibility, what kind of annual pricing comps are you seeing in the market today in Q1?
Yeah, I think that the comment I would make in the market in 2022 is, while we saw significant increases in 2021, we're not seeing the same again in 2022, so much as a holding pattern. Prices aren't particularly slipping or rising, but more holding firm would be the overall theme I would give you for what we've seen so far this year.
Great. That's all I had. I'll get back in the queue. Thanks.
Thanks.
Thank you. As a reminder, star one for questions. We'll go next to Zachary Evershed with National Bank Financial.
Morning, guys. Congrats on the quarter. Thanks for taking my questions.
Hi, Zach. Morning.
Working capital investments are ramping up the volumes and pricing you're seeing. Two-parter for you on inventories. Number one, are you fully prepared for another strong year, or are you still pushing to build up stock in some product lines? Second part, if the bottom does fall out in residential, how quickly can you reverse direction and right-size your inventory position?
Hey, good morning, Zach. It's Seth here. I can take those questions. I think there's a couple questions in there. I'll try and hit them all. You tell me if I miss one. In terms of the working capital, I would say to just you're focusing on inventory, which is correct. The receivable balance is up. Just for completeness, I thought I'd mention, if you look at that on a term basis, it's actually performing great. It's not that it's because we're just selling a lot more. If we just maybe focus more on the inventory piece of your, you know, your question, and we look at the balance, it's higher, but most of that's in the in-transit pipeline. When we look at the inventory just on our floor, that's very well positioned.
If you look at where some of the, you know, quote unquote, what might be considered excess when you look at a financial statement, it's really in the in-transit pipeline. The in-transit is larger for a couple of reasons. One, that product, the costs were rising towards the end of last year, and so it's just worth more. Similar comment on freight costs. Those would be higher, as we know, last year, building off last year, and so that's in there as well. We've also had to do some maneuvering in terms of just managing what are, you know, disrupted and tight supply chains, which, you know, the entire globe is facing today. There's a little bit more in the water.
There's a little bit more in warehouses before it gets to our warehouse, et cetera, etc . In terms of how we position heading into 2022, I think we're positioned really well. As I've mentioned, we've got the stock that I think we need on the floor today. I wouldn't point at something and say there's a big gap in inventory where, you know, we're trying to fill at this very moment. I think that import supply that's coming, it's a bit of a glut in the supply chain there. It's gonna serve us really well as we work through the year here, the first couple of quarters, having that supply, I think is gonna serve us really, really well because as Rob mentioned, our customers are still digging and demand is still very strong.
That inventory is all gonna result in some very good sales for us in the next couple of quarters. To your last question around what if the bottom falls out of residential housing, I guess I'll just give you an obvious statement here, and that is not really one of our planning assumptions for 2022. I mean, for all the reasons Rob mentioned, the macro environment is extremely supportive.
We're not really seeing any signs of that slowing down. In terms of, you know, how we manage the balance sheet in a downturn, I think you saw that. You saw that in COVID when it hit, I guess two years ago this month, where I guess the bottom did fall out. We lost 20% of our sales in a matter of weeks, so we were able to really work down working capital in a quarter. You know, we would enact those same, you know, procedures if that were to happen again. As I said, it's really not something we think is a likely scenario in 2022.
Agree with you there, and that was a great color. Thank you. Just maybe a follow-up on the freight disruptions you mentioned. What's your view on those improving as we move through the year? Will pricing and margins peel back significantly when that does improve?
Yeah, I would describe that also as more stable. You know, some people describe them as modestly improving. We've seen it's not just about freight, it's a pipe, right? It needs to get across oceans. There needs to be sufficient machinery to unload freight, capacity at docks and then warehouses to put it in, and then trucks to bring it in from an inland freight perspective. So it's not one thing. You have to look at it in its totality. We've again done quite well just because of our size in terms of being able to get access to those resources I've just described. But at this point, I don't see, Zach, you know, kind of a lessening or a loosening up of that in the intermediate term.
Once we do see that kind of loosening, what's your view on the impact on your organic growth and your margins?
Well, I mean, the impact is the same as we've seen in a tightening. If you have a loosening, which again isn't what we're seeing, you would have the freight as a component of the total product price would begin to fall. With that, you would have prices that would also come off as well. You would have price deflation against, you know, the significant price inflation that we've really seen through 2021. Just to reiterate, we're not kind of seeing that on the dashboard at this point. At some point down the road when that happens, that would be how that would work its way through the system.
That's clear. Thanks. I'll hop back in the queue.
Thanks, Zach.
Thank you. We'll take our next question from Yuri Lynk with Canaccord Genuity.
Hi, good morning, guys.
Hey, Yuri.
Well, very positive outlook, obviously as you've outlined. When we think about next year, I'll ask a maybe a different question. What are some of the headwinds that you see to growing EBITDA and EPS on 2021? I mean, you know, your EBITDA margin, as you highlighted, I mean, it's almost doubled from pre-pandemic levels. 35% organic growth last year. I mean, these are extraordinary numbers. Just wondering if what sort of the headwinds, if any, there might be to repeating some of that performance or sustaining it?
Yeah for sure. That's a very fair question. I think maybe the first thing I'd just point out is, you've also got, you know, acquisitions growth that's riding beside the organic growth. Even if the organic environment is softer at some point, we've had good acquisitions along the way, and we expect to continue to do that. You know, in terms of headwinds against EBITDA and EPS growth, you know, in 2022, this still looks like a very positive environment. I guess I would also make the observation maybe those headwinds are further ways out. I still want to answer your question, which is, to me, it's, you know, it's relatively connected to the question that Zach just asked.
At some point, if you've got deflation in pricing of building products generally, because they all have had a very nice step change, as we know. That may be as the basic product availability becomes more widely available and prices therefore softer. And/or at the same time, you know, freight, which is a component of moving product around, becomes easier to get at. Both those things with price deflation would have an impact on that bottom line, you know, EPS and EBITDA, because you'd be pushing through. You'd still be pushing through very good volumes, but you'd be doing it with lower cost of goods, which would then carry with it lower gross profit dollars on an absolute basis. So I'd maybe point that one out. The other one that's worth commenting on, Yuri, would just be operating costs.
You know, we've done real well on operating costs. I would say if you look at our costs, the biggest one is our people that we employ and how we pay our teammates. We've had people who have participated on the sales side have done very well in this environment, as you'd expect, through commission-based pay. If we do have a downside where things start to move the other way, you know, there's a natural kind of adjuster there in terms of those costs moving with what's going on with overall sales and gross profit margin dollars. Otherwise, yeah, I think those would probably be the two that I would highlight.
There's always the macro view just around inflation and interest rate environment, you know, we've looked very hard at that, and we actually feel quite comfortable with the path that the Fed is on and where we think it takes us over the next seven open market meetings that are scheduled for this year anyway. It still remains at levels that are gonna support good demand for our products.
Okay. Helpful. Maybe just on capital allocation, I mean, your stock has done extremely well. Nevertheless, it's pretty cheap, very cheap. You know, depending on the numbers you look at, I think it's trading, you know, below the multiple that you would have paid for Mid-Am. Does that stop you from doing M&A? Do you want a better multiple before you do another deal? Do you wanna de-lever a little bit here before you do another deal? Are buybacks on the table? Just how you think about your M&A in the context of your current valuation.
Hey, Yuri Lynk, it's Faiz Karmally here. I can take that one. My comments there would be just from a balance sheet perspective, and do you wanna de-lever before the next acquisition? I mean, that's going to happen naturally. If we don't do an acquisition, as you know, significant free cash flow will be generated this year, and that's where some of it will go. But I would say we're not paused. Like, the balance sheet, you know, with a pro forma leverage post Mid-Am, we talked about it being around a 3. That's comfortable. So, you know, we're still looking at, I think, for an acquisition pipeline today.
In terms of just capital allocation, I mean, our focus is really on growth, you know, supporting organic growth like we did last year, which can require, I'll say opportunistic working capital investments, which served us really well last year, and I think will serve us again well in 2022. I'd mention acquisitions as well. That's really our primary focus of capital. We have the dividends, which we just increased, and there's the NCIB, which your comments were taken, and I agree with what you said, in terms of value, and we'll continue to look at that as a, you know, statement of capital as we move through the year in 2022.
Just, I gotta jump in there, Faiz, as well. Thanks, Faiz. Your comment on the attractive price, I agree wholeheartedly with that. I mean, this is still a. We've had significant returns in price appreciation. This is still an excellent entry point for new shareholders or existing to invest further in the company. We tried to outline, hopefully you were listening up front.
I know some of these calls get a little tedious with the built-in comments, but just with the transformation and diversification of the company, plus the macro environment we see as extremely positive, and the way the company's performed operationally to produce results, and then yet layer onto that the expanded addressable market that we've now created through our acquisitions program, and that we think we have a much broader set of acquisition opportunities going forward. I think all that's very positive. We've clicked over that billion-dollar market cap number, and we've got our eye here in the future, hopefully on joining the CSX index. I think there's just lots of very good things in terms of future potential momentum for the stock here.
Okay. Very good, guys. Thanks for the color. I'll turn it over.
We'll take a follow-up from Zachary Evershed with National Bank Financial.
Interesting follow-up on the broader set of acquisition opportunities you mentioned. Given how rapidly you've grown the business, are you receiving inbound calls from potential targets that are maybe outside of your wheelhouse product wise or geographically?
Yeah, we're getting lots of opportunities come across our desk from an acquisitions perspective, Zach. The, you know, the Novo deal plus the Mid-Am deal were both chunky deals and have put us on some new lists, I would say, in terms of U.S. big market banking community. The answer is yes. I'd say we always go back to that kind of grounding statement that, you know, HDI is looking to be a world-class distributor of architectural wood products. We run it through that lens. It's a fairly broad lens which allows us to evaluate, you know, both Novo and Mid-Am and come to a determination if that is accretive for the company. There are other things that are coming through the front door like that that we are considering.
Anything that we do, though, is going to be strategic. It's not growth for growth's sake. We're trying to build something special within the industry here and feel like we've got good momentum in doing that.
That's helpful. The last one from me, could you give us a bit more color on where you're seeing strength and weakness in your commercial end marketplace?
Yeah. Nothing probably new there, Zach, from what we've said in the past, but I would say, you know, we've seen, because there's been lots going on in healthcare, obviously, that has been a sector where our fabricator customers have had greater activity in recent times. You know, public buildings is a little bit of a wait and see as it relates to infrastructure bill in the U.S. and whether there's some knock on effects from government spending in that area. We're seeing a little bit more strength in hospitality. Recreational vehicles has been very strong for us for the last couple of years. Finishing surfaces and millwork around, you know, things like industrial data centers has obviously been a source of strength recent times.
That's great. Thanks. Congrats on the quarter, and I'll turn it over.
You bet.
At this time, there are no additional questions in queue. I'd like to turn the call back over to our speakers for any additional or closing remarks.
Okay. Yeah, thanks, everyone on the line for joining us. Appreciate your interest as always. Do reach out to Faiz, myself, or Ian if you've got questions or follow-up comments and have a great day.
Thank you. That will conclude today's call. We appreciate your participation.