Good morning. My name is Josh, and I will be your conference operator today. I would like to welcome everyone to the ADENTRA Second Quarter 2025 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your questions, please press the star button followed by the number two. With me on the call are Rob Brown, ADENTRA's President and CEO, and Faiz Karmally, Vice President and CFO. ADENTRA's Q2 2025 earnings release, financial statements, MD&A, and other quarterly filings are available on the investor section of our website at www.adentragroup.com. These statements have also been filed on ADENTRA's profile on CEDARplus at www.cedarplus.ca.
I want to remind listeners that management's comments during this call may include forward-looking statements. These statements involve various known and unknown risks and uncertainties that 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 ADENTRA's earnings, press release, and financial filings for a discussion of the risks and uncertainties associated with these forward-looking statements. All dollar figures referred to today are in US dollars unless stated otherwise. I would now like to turn the call over to Rob Brown.
Good morning, everyone, and thank you for joining us today. We delivered strong results in the second quarter, demonstrating the resilience of ADENTRA's business model in what continues to be a challenging environment. Residential construction remains soft, and macro uncertainty, particularly around the U.S. trade landscape, continues to weigh on sentiment. Despite that backdrop, we delivered sales of $597 million, adjusted EBITDA of $54 million, and adjusted EPS of $0.88. Sales were up nearly 9% compared to last year, with the increase driven by the contribution from Wolf Distributing, which we acquired last summer. On an organic basis, sales held steady. Modest volume declines were offset by pricing gains. It's encouraging to see product pricing gradually recover after a prolonged period of deflation in 2023 and early 2024. Given our price pass-through model, higher prices generally translate into stronger revenue and gross profit, notwithstanding changes in market demand.
We also saw improvement in gross margin, both year- over- year and sequentially, reflecting effective pricing and procurement execution. On the cost side, we continue to manage the business with discipline. Organic operating expenses were up less than 1%, which is well below deflation. Cash flow from operations was solid at $33.9 million, and we returned $11.2 million to shareholders during the quarter through dividends and share repurchases. Since March, we've repurchased more than 680,000 shares, representing roughly 2% of shares outstanding, at an average price of C$28 per share. Our leverage ratio ended the quarter at 3.0x , up from 2.4x at the start of the year. That reflects the typical inventory build we see in the first half of the year as we prepare for the seasonally stronger summer and fall construction season.
We expect inventory to come down in the second half, which, when combined with cash flows from operations, should bring leverage back into the mid-teens range by year-end and position us well for 2026. On the M&A front, we've completed seven acquisitions over the past five years, representing over $1.2 billion in pro forma revenue. These transactions have expanded our reach, diversified our product offering, and increased our exposure to higher margin categories. Wolf, which we acquired at the end of July last year, has enhanced our presence in the U.S. Midwest into the new specialty products and strengthened our position with co-delivery customers. Turning to trade, approximately 14% of our product mix is now subject to country-specific tariffs at an average duty rate of 16%. The U.S.
Section 232 investigation into wood products remains ongoing, and depending on the outcome, an additional 20% of our product mix could ultimately be affected. That said, we've shown we can navigate this environment. Our price pass-through model allows us to preserve margin, and our sourcing network, which spans over 30 countries, gives us the flexibility to switch supply as we need to. We also benefit from strong domestic vendor relationships, which helps when customers prefer U.S. source products. Finally, we had a positive outcome on the outstanding countervailing duty and anti-dumping duty trade matter in the second quarter, resulting in a $9.7 million net recovery in operating expenses and an expected refund of $23.9 million in previously paid duties. While new countervailing duty and anti-dumping duty investigations are underway, this relates to a smaller portion of our supply chain, and we do not expect a material financial impact from it.
With that, I'll turn the call over to Faiz to take you through the financials in more detail. Faiz?
Thanks, Rob, and good morning, everyone. Let me walk you through our financial performance for the second quarter. Just a quick reminder, we report in U.S. dollars. Total sales came in at $597.1 million, up 8.7% from the same period last year. That growth was largely driven by the contribution from Wolf Distributing, which we acquired at the end of July 2024. On the organic side, sales were flat. Pricing was up 2.3%, but that was offset by slightly lower volumes. Looking at the regional performance, in the U.S., sales grew 9.3%, reaching $551.6 million. That includes a $48.6 million contribution from Wolf. Organically, we saw price gains of 1.9%, which were offset by a 2.2% decline in volumes. In Canada, sales were C$63.1 million, up 2.8%, with pricing up 3.6% and volumes down slightly.
Gross profit was $130.1 million, an increase of 9.1%, and gross margin came in at 21.8%, up slightly from last year. That reflects both the benefit of higher pricing and strong execution on the procurement side. We also saw a 3.9% reduction in operating expenses, which came in at $88.6 million. That includes a $9.7 million recovery of trade duties, which helped to offset the $5.5 million in expenses related to Wolf and a small $0.6 million increase in organic operating costs. Adjusted EBITDA grew to $54.3 million, up 12% from Q2 of last year. That improvement was driven by a stronger gross profit and continued cost discipline across the business. Net income for the quarter was $22.1 million or $0.89 per share, up nearly 30% year- over- year. On an adjusted basis, net income was $21.9 million or $0.88 per share compared to $1.03 last year.
The year-over-year decline on an adjusted basis was due to higher interest and past expense. Operating cash flow was $33.9 million compared to $23.8 million in Q2 of last year. That increase was driven by higher EBITDA and lower tax payments, partially offset by a $7.5 million investment in working capital. This investment is typical for this time of year as we build inventory ahead of the summer and fall construction season. We expect working capital to decline in the second half as inventory is sold through and converted to cash. We ended the quarter with net debt to EBITDA of 3x , and we expect that number to come down closer to mid-June by year-end as inventory days improve. We continue to have ample flexibility under our $600 million revolving credit facility, which we extended to 2030 earlier this year. Lastly, we remain disciplined in how we deploy capital.
On August 6, the board approved a $0.15 quarterly dividend, and during Q2, we returned $11.2 million to shareholders through dividends and share buybacks. Since March, we repurchased more than 680,000 shares, representing roughly 3% of shares outstanding, at an average price of C$28 per share, which we believe is meaningfully accretive for our shareholders. With that, I'll turn things back to Rob to discuss our outlook. Rob?
Thanks, Josh. Over three years of our second quarter results, we're approaching the near term with a decreased cost. Affordability remains a challenge in the U.S. housing market with persistently high mortgage rates and constrained inventory weighing on buyer activity. Trade-related uncertainty also continues to escalate, increasing the risk of renewed inflationary pressures. Reflecting these dynamics, our average daily sales in July are tracking modestly below Q2 levels, down about 4%. That said, we remain confident in the long-term fundamentals of the residential construction market. Structural undersupply, strong demographic demand, and an aging housing stock all point to continued underlying growth over time. As always, our focus is on discipline execution. We're continuing to operate with rigor, drawing on our expertise navigating through different points in the cycle. Our broad product offering, national footprint, and strong supplier relationships provide the flexibility we need to adapt and the foundation to perform.
Looking ahead, we'll continue to advance our strategic priorities under our full-cycle value creation framework. Our goal remains the same: to deliver double-digit returns and acquisitive growth by driving platform efficiency, pursuing organic initiatives, and executing targeted discipline M&A in our large and fragmented market. With that, I'll turn the call back to the operator for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star button followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. First question is from Kyle McPhee of Cormak Securities. Please go ahead.
Hello, everyone. First question, your commentary continues to suggest your full capital out of inventory through the back half of the year. I'm just curious about the risk that maybe this doesn't happen. We all see supply chains and the trade environment, general risk being elevated, many companies across many sectors stocking up versus stocking down. Is this something that may manifest for you just as a risk mitigation effort? You often lean towards risk reduction versus de-leveraging through inventory monetization, but we really have no reason to have to do that.
I think you can take it as written, Kyle. The intention is to throw off a lot of cash in the second half. We're well positioned with inventory, and the rate of sale that we had and that we anticipate through Q3 and into Q4 should get us where we need to go by year-end. We feel confident about that.
Okay. Thanks for that confidence boost . Second one for me, just a higher-level question. You know, one aspect about one aspect of your long-term value creation framework. That framework calls for EBITDA margins in the range of 8% -1 0%. I'm curious on how you get from the lower end of that range, where you've been prevailing in recent years, to the higher end of that range, you know, in a durable way. Is that something that can be achieved from the current mix of business on the back of things like efficiencies and best practices, or is the higher end of that range something that will require more scale and makeshift over time through your M&A programs? You know, adding scale and awaiting quarter prior margin categories and channels through that. Any color on this stuff would be appreciated.
Sure. Yeah. I don't think it needs to be dramatic. We have operated above those margin rates in the past in different points of the market cycle, but there is a significant amount of operating leverage through the P&L. Obviously, top-line additions will help, whether that be through volume or pricing. We do feel like there's probably a tailwind here in pricing. We've seen that recently as well. Scale and, you know, product mix continuing to evolve as we have significantly shifted over the last number of years, in part through just new supplier relationships, but also through our M&A program. We've continued to kind of upsize the specific component of what we do. It's not going to be one thing. It's going to be a combination of factors that gets us into the higher end of that range over time.
Got it. Okay. Thanks for the color. I'll pass it on.
Thanks, Kyle.
Next question is from Hamir Patel from CIBC Capital Markets. Go ahead.
Hi. Good morning. Rob, we're seeing a lot more, larger M&A playing out in the distribution space. Has there been any evolution in the M&A pipeline of the sort of scale and type of targets that you're considering? Any change in vendor expectations?
I would say at this point, we obviously are keenly watching what's going on, and we're enjoying watching building products to be distributed and create what we think are good multiples. That's not been in our space from a product perspective, for one. Think of architectural building product categories, as opposed to things like roofing and gypsum wallboard. It's also been primarily around one-step distribution, folks that are selling directly to builders, whereas we're in a two-step channel and servicing a very important supply chain requirement with what we're doing. Those things combined, we're keeping our eye on it, of course, but they're not impacting our own acquisitions pipeline and our management of our M&A program going forward at this point.
Okay. Rob, are you seeing any impact on your business from the MasterB rand, American Woodmark, combination?
It was just yesterday, so no, not at this point. We view the continued consolidation upstream and downstream generally as a positive for us because you're working with partners that are larger and more sophisticated and are looking for the same in their distribution partners that can bring them worldwide sourcing solutions and a national footprint and scale solutions, multi-geography, multi-product type of solutions. Generally, we like that. American Woodmark, MasterBrand, and CabinetWorks are kind of the big three from an OEM cabinet manufacturing perspective. We do do some OEM business for sure, but we are focused very much also on the smaller to mid-sized, more regional and specialty customers as well. They're just one piece of the channel.
Okay. Great. This is the last question I had. Faiz, what do you sense is declining when you take stock to the refund of the previously paid duties?
Hey, Hamir. The way I would describe that would be just from our understanding of the way the law is written, that should be payable to us within the next six months, essentially by the end of the year is our understanding, which is why we had the final results, we accrued it, and it's sitting on the current side of the balance sheet. That's the latest information we have. It supports the position we've taken. We will continue to look for communication out of Customs and Border Patrol, who administers this, as to the timing and if they decide to do something different. That's the information we have today.
Okay. Great, thanks, that's all I had. I'll turn it over.
Next question is from Ian Gillies from Stifel.
Morning, guys.
Hey, Ian.
For the July sales, average daily sales being down 4%, are you able to provide, I guess, any detail around what of that's volume and what of that's price? Just given the era of this, it's a little hard to measure that number just in isolation on its own.
Yeah. We wanted to put that number out there to give people a little bit of a view of where things are at, you know, post the disclosure period. I would say that things improved more near the latter half of July than the earlier part. It's an early Q3 indicator that we can kind of look at. No specific comment on the price versus volume. I just think it's too early for that, name. I would say that it's not a specific geography. It's not a specific product category. It's an overall momentum comment across business.
Understood. Are you able to maybe talk a bit about some of the feedback you're getting from the various channels you work with? Obviously, you have your industrial distributors and your big-box retailer. Like, are you getting significantly different views from them, or is it pretty consistent across each channel?
No, pretty consistent. We obviously follow the public company reporters in terms of the home center, and then we get some good reporting out of customers like BFS. I wouldn't say that there's any specific diversion there, nor would I call out anything specifically different from the industrial channel.
Understood. Thanks very much. I'll turn it back over.
Thanks, Ian.
Next question is from Zachary Evershed from National Bank Financial. Please go ahead.
Morning, guys. Congrats on the quarter.
Hey, good morning, Zach.
Poking on that reading in July, would you say it's fair to say that there was a kind of gradual flowing into June and then July that might hint at some overall momentum, as you mentioned?
I mean, it's four weeks. We probably wouldn't say either of us would try to parse it any more than I just did, which is to say there's a little more momentum near the end of July than the beginning. Sure. We'll have to see how things proceed through the balance of the quarter here.
Got you. Thanks.
Oh, I apologize on that. If you could just press the star button again on that question. I didn't mean to cut you off. I thought you were done, so I really apologize for that. In the meantime, we do have Kyle McPhee from Cormak Securities. Go ahead, Kyle.
Hello again. Thanks for all the exposure on the tariff exposure right now, and what it could become in this fluid type of environment. My question is, based on what is impacted by tariffs right now, that 14% bucket at a 16% tariff rate, is price the tool you would use to deal with the cockpit, or is this specific, you know, mix of products something you'll deal with by shifting supply chains? I'm just trying to get a feel for your price, how your pricing variable is going to manifest in the coming quarters based on, you know, what you know about your outfitting and substitutes in these specific categories.
Yeah, I understand the question. The pricing is definitely the main lever to pull here. We operate a price pass-through model. While we're in a more unusual time as it relates to tariffs and, I guess, having to be more dynamic with pricing, that's just how we intend to deal with that. We will obviously look at moving supply chains around where we need to, but we're not bullet-book. We've got the ability to move our purchase order book around between jurisdictions if we have to. I think the most salient point is the first one, which is if our sourcing costs go up, our intention is to pass that through and maintain our margin.
Do you have much difference on your end?
Hey, Kyle. We had you break up on us. Would you mind repeating the question?
On these 14% figures, I think that percentage of product mix, would it be much different on a percentage of revenue basis?
No. No. Consistent.
Okay, thank you. That's it for me.
You bet.
Okay. We have Zachary Evershed from National Bank Financial. Zachary, again, I apologize for cutting you off. You could continue on.
Thank you very much. For gross margin, do you expect any pressure going forward as you run down stock of pre-tariff inventory or a temporary lift in the new pricing environment?
I mean, it's an interesting comment to make. When you've got pricing move with, you know, stocks and being more dynamic, you can have intermediate impacts as you're passing prices through one way or the other. There could be a little bit of noise back in gross profit margin, but nothing that we expect to be a significant item. We'll just be most focused on passing through costs and maintaining our role in channel as a distributor offering product solutions, but not trying to time markets and load inventory up or down, but, you know, provide those through on as smooth a basis as we can. We feel like the current gross profit margin range that we've seen is within a range of sustainability.
Perfectly clear. Thanks. I'll turn it over.
Thanks.
Next question is from Jonathan Goldman of Scotiabank. Go ahead.
Hi. Good morning, Rob. Thanks for taking my questions. Have we seen any different trends? Good morning. Any difference in trends in consumer spending habits between Canada and the U.S.?
I think we've all been fairly impressed by the continued resilience. Obviously, down self-sabotaging, and whenever I'm in country, if I could say it that way, just the level of optimism and let's work through things and solve problems. The entrepreneurial spirit is always impressive when you go to the U.S. I think Canada just naturally has just made it. Canada's performing very well for that. That's probably how I would characterize the North Shelf, as an opinion.
Interesting. Rob, could you just clarify the cadence of daily sales that you saw from the quarter and into July? It seems like the first two weeks of July was below and has since improved even, you know, marginally, but still, you had that bottom in the beginning of July. Is that a correct way of thinking of things?
I like your word marginally. Yes, first half, second half of the month of July, there was a marginal pickup there.
Perfect. I may have missed this, but you did upsize the potential tariff exposure. At the current rates that you guys are estimating, do you have any concerns about passing that through?
No, I mean, that's the playbook. It's not like we are, as a distributor, sourcing or facing different sourcing conditions than our competitors are. We'll see how the market behaves. As we've seen in other periods of pricing volatility, there's generally been fairly good competitive discipline. Absent us doing something different, at that point, we're expecting the same and that others will react accordingly.
Okay. That's a really good color. Maybe just one more from me. Are you able to give an update on how Wolf performed in the quarter? Just looking at the results, it seems like they did significantly well. I know there's some seasonality in the business, but still, it looks like a nice uptick from Q3, Q4, Q1, and Q2.
Yeah. Your observations are bang on in both respects. It is a business that's got a decent amount of seasonality to it because of the premium decking products that are included in their product mix. Setting that aside, the team's done a great job. They're all still there, settled in as part of the ADENTRA family, and we're very pleased with them. I think they're very pleased with where they've landed the business as well. We're pleased with how that acquisition is proceeding. We're, I guess, just about a year into it, and no surprises.
Definitely showing the results. If you clarify, I'll get back to you.
Thanks, Jonathan.
Next question is from Frederic Tremblay from Desjardins. Please go ahead.
Thank you. Good morning.
Morning.
Most of my questions have been answered already, but maybe one on the sales dynamics there. I'm just trying to reconcile the strong Q2 with your disclosure of a 4% decline on average daily sales in July. Do you feel that there was some demand pull forward in Q2, or nothing out of the ordinary to call out on that front?
Nothing to call out. There's no factors that would indicate a pull forward with our customer base. We're trying to help you all out with just a little bit of how things are proceeding post the quarter. You know, things can move around. We've got a ways to go yet, I guess, would be my point with the quarter. Through July, that's where things are seeming relative to the pace we saw on average during Q2.
Understood. Appreciate the cover. Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press the star button followed by the number one on your touch-tone phone. You'll hear a prompt that your hand has been raised. We'll wait one moment for any additional questions. It appears there are no further questions at this time. I'd now like to turn the call back over to Rob Brown, ADENTRA's President and CEO, for final closing comments.
Okay. Thanks, John. Appreciate you hosting us today. If there's any follow-up from anyone on the call, please reach out to Faiz or me. We'll be responsive to your questions and hope everybody has a great day.
Thanks, ladies and gentlemen. This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.