INVESTOR PRESENTATION Six months ended June 2019 TSX: HDI - - PowerPoint PPT Presentation

INVESTOR PRESENTATION

Six months ended June 2019 TSX: HDI

www.hdidist.com

Dark Brown Charleston Oak Crystalite Rain Cloud Antique Oak Icy Mherge Oak Retro Baltimore

Forward Looking Statement

Certain statements contained in this presentation, including all statements that are not historical facts, contain forward-looking statements and forward-looking information within the meaning of applicable securities laws. Forward-looking statements normally contain words like believe, expect, anticipate, plan, intend, continue, estimate, may, will, should and similar expressions. Such statements are not guarantees

• f future performance. They are based on management's expectations and assumptions regarding

historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate in the circumstances. Management has based these statements on estimates and assumptions that they believed were reasonable when the statements were prepared. Actual results could be substantially different because of the risks and uncertainties associated with the Company's business. More information about the risks and uncertainties affecting the Company's business can be found in the "Risk Factors" section of our Annual Information Form dated March 14, 2019 which is available under the Company's profile at SEDAR (www.sedar.com). Although we have attempted to identify factors that would cause actual actions, events or results to differ materially from those disclosed in the forward-looking statements or information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. Also, many of the factors are beyond the control of Hardwoods. Accordingly, readers should not place undue reliance on forward-looking statements or information. Hardwoods undertakes no obligation to reissue or update any forward-looking statements or information as a result of new information or events after the date hereof except as may be required by law. All forward-looking statements and information herein are qualified by this cautionary statement.

2 3

Management Update

2 4

• Macro environment
• Financial performance
• Re-established import advantage
• Trade landscape
• Capital markets
• Outlook

Valuation and Free Cash Flow Conversion

2 5

72% 57% 21% 0% 20% 40% 60% 80% HDI Canadian diversified peers (2) TSX diversified (3)

LTM EBITDA to FCF Conversion (4)

(1) EBITDA multiple is a non-GAAP measure and is calculated as (share price X issued share capital) + debt), divided by EBITDA. HDI’s EBITDA is as disclosed in the Company’s MD&A reports filed on SEDAR.com. (2) Average of the following companies: Richelieu, CCL Industries, Stella Jones, CanWel, Richards Packing, Winpak, IPG. (3) Includes TSX listed companies classified under the following industries: Chemicals, Construction Materials, Containers and Packaging, Paper and Forest Products, Capital Goods, Commercial and Professional Services, Transportation, Consumer Discretionary, and Consumer Staples. (4) EBITDA to FCF conversion is a non-GAAP measure and is calculated as (operating cash flow before changes in working capital – minus capex), divided by EBITDA. HDI’s EBITDA is as disclosed in the Company’s MD&A reports filed on SEDAR.com. Note – excludes the impact of IFRS 16

HDI LTM multiple: 6.3x

HDI is the #1 Distributor of Architectural Building Products in N.A.

Import: Guararapes MDF: Commercial fixtures Domestic Supplier: Arauco TFL: Residential Use 6

(1) Measured from December 31, 2014 to June 30, 2019 (2019 period on a trailing twelve month basis)

Outstanding track record of growth

• Five year average(1) annual sales

growth 21%, and Adj. EPS growth

• f 11%

Proven acquisitions strategy

• 43 US locations acquired in past

seven years

• $550 million of annual revenue

added

Highly fragmented industry

• HDI market share estimated at 10%

Shareholder returns

• Dividend has been increased every

year for the past seven years

• Share repurchase plan in place and

being utilized

Disciplined business model

• +50 year old business
• Experienced management team
• Low debt leverage
• No significant supplier/customer

concentration

History of Growth and Diversification

2 7 70% 15% 15% 60% 20% 20% 50% 40% 10%

60% 40%

2010 2014 2018

Sales Mix by Market Sales Mix by Country Locations Customers 26 + 2,100 32 + 10,000 62 + 35,000

75% 25% 90% 10%

Residential Commercial Diversified USA Canada

Products Diversification

8

• Higher value decorative products, generally non-commoditized and subject to stable pricing
• Approximately 25% of the products are exclusive or semi-exclusive offerings
• Includes globally sourced, proprietary brands

Critical Role in the Value Chain

9

Manufacturers

Approximately 1,000 Suppliers Worldwide No significant supplier concentration

(largest less than 6% of purchases)

Architects & Designers Residential Customers 50% Commercial Customers 40% Diversified 10%

62 Locations North American Sales Team 440 Strong Customer Base + 35,000 No customer concentration

(largest less than 2% of sales)

Comprehensive North American Network

 Proven market leader for 50+ years in a fragmented industry  Diversified customer and supplier base, no significant concentration  Experienced management team, on average 15+ years with the Company

10% 90%

Revenue by Country

Canada U.S.

Estimated N.A market share = 10%

10

FY 2019 – Summary Statistics

11

HDI ($CAD) (millions) H1 2019 H2 2018 Chng Chng %

Sales $591.6 $568.9 +$22.7 +4.0%

US Organic ($USD)

• $8.7
• 2.3%

US Acquisitions ($USD) +$11.5 +3.0% CAD Organic ($CAD)

• $2.6
• 3.6%

Gross Profit $106.0 $102.0 $4.0 +3.9%

Gross Profit % 17.9% 17.9%

Operating Expenses $82.3 $74.5 $7.8 +10.5%

Operating Expenses % 13.9% 13.1%

Adjusted Profit $15.2 $19.8

• $4.6
• 23.3%

Adjusted diluted EPS $0.70 $0.91

• $0.21
• 23.1%

Cash from operating activities $34.0

• $10.3

+$44.3 Less cash outflows for plant and equipment $1.4 $1.8

• $0.4

Free cash flow $32.6

• $12.1

+$44.7

Track Record of Growing Sales with Stable Margins

8

Sales Growth % 21% 23% 25% 38% 31% 9% 7% Sales Growth %

excluding acquisitions and FX translation impact

18% 10% 9% 5% 5% 6% 2%

12

$306 $371 $456 $572 $789 $1,037 $1,134 $1,157 17.6% 18.2% 17.3% 17.4% 18.2% 18.5% 17.7% 17.7% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% $0 $200 $400 $600 $800 $1,000 $1,200 2012 2013 2014 2015 2016(1) 2017 2018 Q2 2019 TTM Sales Gross Margin

“Adjusted Profit” and “Adjusted EPS” are non-IFRS and non-GAAP measures. See the Company’s Annual Report filed on SEDAR.com for a reconciliation of these measures to IFRS and GAAP measures.

Accretive Growth For Shareholders

13

% Increase 100% 9% 52% 4% 15% 5%

• 13%

11 14

HDI’s Long Term Growth Strategy

2018

• 1. Market

Growth

• 2. Organic

Growth

• 3. Acquisitions

2023 $125 m $150 m $175 m $1.1 $1.5

+$1.1 billion +$1.5 billion

• Anticipated market growth of 2% per year
• Strategic initiatives yielding an additional 2% - 4% per year
• Acquisitions targeting another 3% - 5% per year

13

Per FMI Consulting; Construction Outlook Q2 2019 Report

12

• Approxiamately 50% of our sales end up in residential

applications (including repair and remodel)

• Population growth / demographics suggest pent up demand
• Long-term mortgage rates near historic lows
• Supply of existing homes at an all time low
• Consistent demand for new projects
• Strong N.A economy

Per National Association of Home Builders

Residential Construction

15

• 1. US Construction Market, Capture Share

Commercial Construction

Prolonged period of below-average construction, potential for catch up growth

Remodeling Activity

$ $100 $200 $300 $400 $500 $600 $700 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Spending on non-res construction (B$)

500 1,000 1,500 2,000 2,500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Housing starts (in millions)

Wood Products

• Core competency of HDI
• Core products: Hardwood lumber,

Hardwood Plywood

• Range of market share by brand, by location
• Optimize market share opportunity

16

• 2. Additional Market Share, Strategic Product Categories

Decorative Surfaces and Composites

• High-growth product segment
• Design trends and market preferences

changing at a rapid pace

• Under-represented from a

market share perspective

• Opportunity to take advantage

7% 93%

Decorative Surfaces

• Est. Market Share

15% 85%

Wood Products

• Est. Market Share

43 U.S. locations acquired in the last 5

years, +$550MM in revenue added 17

• 3. Acquisitions, Capitalize on Significant Opportunity
• Significant market share available, highly fragmented industry
• Robust acquisitions pipeline, dedicated internal resources
• Attractive purchase multiples, accretive

Acquisition Date Target Price Paid

(US $)

Annual Revenues

at acquisition (US $)

Optimization Plan Status and Highlights 2019 $3.6 M $12 M

• Strategic HR: Leverage HDI existing leadership in the region
• Financial strength: Provide liquidity
• Status: Ongoing

2018 $3.7 M $13 M

• Strategic HR: Acquire key salespeople
• Status: Complete

2017 $6.0 M $25 M

• Financial strength: Provide liquidity
• Strategic HR: Leverage HDI existing leadership in region
• EBITDA margin improvement achieved: +50 bps
• Status: Ongoing

2017 $0.6 M $5 M

• Strategic HR: Acquire key salespeople
• Status: Complete

2016 $107.0 M $282 M

• Supply chain: Consolidate vendors, rebates, product access
• Marketing: Coordinated approach, enhanced offering
• Products: Product differentiation, expertise added
• Specification: Add talent, contacts, consolidate teams
• Strategic HR: Significant addition of talent
• Technology: Consolidate operating systems, add functions
• Financial strength: Provide liquidity
• EBITDA margin improvement achieved: +60 bps
• Status: Ongoing

2014 $15.0 M $30 M

• Supply chain: fill in product gaps, unique offering
• Status: Complete

2013 $2.8 M $4 M

• Supply chain: fill in product gaps, unique offering
• Status: Complete

2011 $13.5 M $40 M

• Supply chain: Leverage HDI import program, product access
• Strategic HR: Acquire talent
• Financial strength: Provide liquidity
• EBITDA margin improvement achieved: +200 bps
• Status: Complete

EAGLE PLYWOOD

• HDI supports brands in the market place
• Competitors generally will not have same support structure in place
• HDI opportunity (represented by the grey color in circles below) to optimize the platform
• Potential to build a sustainable competitive advantage, improving EBITDA margins over time
• Supply Chain Optimization
• Collaborative Marketing
• Professional Sales and Product Training
• Specification sales channel
• Strategic HR
• Technology Solutions
• Financial Strength

Profit Opportunity - Optimize the Platform

Regional Competitor

18

Continued responsible management of the balance sheet Return cash to shareholders through dividends and share repurchases June 2019 FY 2018

Net Debt $98.4 $111.4 Adjusted EBITDA after rents(1)(2) $51.9 $56.3 Net Debt to Adjusted EBITDA after rents(1) 1.9 2.0 Unused debt facility $90.2 $78.4

(1) “Adjusted EBITDA after rents” and “Net Debt to Adjusted EBITDA rents” are Non-IFRS and Non GAAP measure. See the Company’s Annual Report and Second Quarter MD&A filed on SEDAR.com for a reconciliation of this measures to IFRS and GAAP measures (2) June 2019 period is presented on a trailing twelve months basis.

19

Debt and Liquidity Profile

Pursue value-added acquisitions Support anticipated organic growth in sales

Priorities

(1) Payout ratio is defined as dividends per share divided by adjusted profit per share.(measured as at December 31, 2018) (2) Dividend yield defined as dividends per share divided by the stock price (stock price as at June 30, 2019)

20

Dividends

 Dividend yield(2) of approximately 2.5%  Seven straight years with annual dividend increases

0% 5% 10% 15% 20% 25% 30% 35% $- $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 2012 2013 2014 2015 2016 2017 Q3 2018 TTM

Dividends vs. Payout Ratio (1)

Dividends declared Payout ratio 2018

Sustainable and diversified business model Positive multi-year outlook in key end markets Fragmented industry, significant acquisition opportunity exists Attractive conversion ratio of EBITDA to free cash flow(1) Strong balance sheet to enable growth and execute on initiatives Long term record of shareholder returns

     

21

Why HDI?

(1) Free cash flow defined as last twelve months operating cash flow, excluding changes in working capital, minus capital expenditures.