Richelieu Hardware Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 11, 2024

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. First of all, I have to apologize for my voice. I have a cold. So please, I will try to do my best to handle that speech.

Operator

I welcome to Richelieu's conference call for the Q1 ended February 29, 2024. With me is Artois Noclar, CFO. As usual, know that some of today's issues include forward looking information, which is provided with the usual disclaimer as reported in our financial filings. Our financial year began with a good Q1. We pursued our acquisition strategy, choosing 2 new acquisitions followed by a third one on March 27.

Operator

We achieved a good level of sales equivalent to the Q1 of 2023, which is appreciable since Q1 sales last year continued to benefit from favorable market conditions. This result reflects a significant contribution of our acquisitions and market development initiatives supported by our strategies of value added service, innovation and market segment diversification, it should be remembered that the Q1 is always the weakest period of the year. Regarding our Q1 margins, they were affected by 2 main factors. Tarboro is lower gross margin and the startup period of centers expanded in 2023. Despite the significant reduction in our inventory over the past year, we still have certain inventories purchased at higher price than current costs.

Operator

The sales of these products at market price has had a negative impact on our gross margin. We expect the situation to be resolved as these products are reordered. Secondly, as already announced, we sell out of our distribution centers underwent expansion in modernization projects in 2023, including our new Calgary Center, which went operational last December. The startup and development of these centers, in addition to being impacted by current market condition, have also affected our margins downwards. We are actively working on these expanded and modernized center in order to accelerate their startup and market development.

Operator

As for acquisition, we are very pleased with the 3 businesses we have acquired since the beginning of the year. Olympic Forest Products is a distributor of specialized lumber and paddle products with the distribution centers in AUM, Ontario. And RapidStar is a distributor of specialty hardware with the distribution center in Whitman, Ohio. On March 27, we completed the acquisition of Allegheny Plywood, a distributor of specialty panels and decorative surfaces, which operates distribution centers in Pittsburgh and Allentown, Pennsylvania as well as in Cleveland, Ohio. In addition to contributing approximately $6,000,000 to annual sales, these 3 transactions add new customers, complementary products and expertise and strengthen our presence in this market.

Operator

I'll now hand over to Arthur for quarterly financial review.

Speaker 1

Thanks, Richard. First quarter sales reached $407,000,000 up 1%, a 0.4% internal decrease, offset by 1.4% growth through acquisitions. Sales to manufacturers stood at $350,000,000 up 1.6%, mostly from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of $57,300,000 down $1,600,000 or 2.7%.

Operator

In Canada, sales amounted to $232,000,000

Speaker 1

similar to last year. Our sales to manufacturers reached $188,000,000 and hardware retailers and renovation superstores market sales stood at $44,500,000 down 2%. In the U. S, sales grew to $130,000,000 in U. S.

Speaker 1

Dollar, up 1.7 percent, 1.1% from internal growth and 0.6 percent from acquisitions. They reached US175 $1,000,000 an increase of 1.6% and represented 43% of total sales. Sales to manufacturers reached CAD120 1,000,000 up 2.2%, 1.7% from internal growth and 0.5% from acquisitions. The hardware retailers and renovation superstores market sales were down 4% from the corresponding quarter of 2023. 1st quarter EBITDA reached CAD40.4 million, dollars down $8,700,000 or 17.7 percent over the Q1 of 2023.

Speaker 1

The lower gross margin and our 2023 expansion projects being in startup phase in the current market condition affected the EBITDA margin downwards. As a result, EBITDA margin was 9.9% this quarter. 1st quarter net earnings attributable to shareholders totaled 15,200,000 dollars down 35.7 percent. Diluted net earnings per share was 0 point 2 $7 compared to 0 point 4 $0 last year. 1st quarter cash flow from operating activities before net change in non cash working capital balances was CAD 35,000,000 or CAD 0.62 per share.

Speaker 1

The net change in non cash working capital used cash flow of CAD 34,000,000, dollars mainly reflecting the increase in inventories and the decrease in accounts payable and accrued liabilities, while accounts receivable and other items represented a cash inflow of 1,200,000. As a result, operating activities provided a cash inflow of 500,000 compared to a cash inflow of 18.8 $1,000,000 last year. We paid dividend of $8,400,000 to shareholders and we invested $15,500,000 including $7,400,000 for 2 business acquisitions and $8,000,000 in CapEx, of which $3,500,000 relating to expansion projects. At the end of the quarter, the financial situation was healthy and solid with working capital of $623,400,000 and almost no debt. I now turn the call

Operator

over to Richard. Thank you, Antoine. In conclusion, our priorities are to pursue our innovation and business acquisition strategies, develop synergies with our acquisitions, control costs and develop strategic markets. We continue to build on our strengths, our team, our value added service with logistics tailored to customer needs, our financial solidity and our efficient network enables us to extend our coverage in the North American market more and more. With our ability to adapt to changing market conditions, we continue to seize and create opportunities while remaining service, innovation and result oriented.

Operator

Thanks everyone. And I'll be happy to answer your questions.

Speaker 2

Thank you. Your first question comes from Amir Patel from CIBC Capital Markets. Please go ahead.

Speaker 3

Hi, good afternoon. Richard, the EBITDA margins dipped below 10% in Q1. Do you think the Q1 marked a trough for margins? And what kind of recovery would you expect on the margin front into the Q2?

Operator

I can explain the drop in the EBITDA margin because of the what we call those inventory costs that are higher than the current costs. So that has cost to us during the quarter $3,500,000,000 The modernized project that we achieved in 2023 increased our expenses by $2,500,000 I think these investments were pretty good and would bring a lot of sales in the future. But since the market is slow as we speak, so we don't recover as quickly as we were expecting. There is also increases expenses. As you know, we have not started yet to increase our own selling pricing.

Operator

That should happen early in the Q4 and maybe in 2025. For the time being, we cannot increase our pricing for the reason that you already know. But our costs have increased at the same time. So if you take the salaries and the rent, that type of expenses have created $1,500,000 of additional expenses. So basically, I think things will improve.

Operator

The more they use, it's going to go the more it's going to improve mainly, I would say, from the

Speaker 1

Q1, we expect the situation to improve. And Anir, one element to consider is that the Q1 is always the weakest period. So usually Q2, Q3 and Q4 are around 2 points higher than Q1 due to a lower volume in Q1 versus the other quarters.

Speaker 3

Okay. So fair to say then, all speaking, if it's 2 points higher, you'd be sort of north of 12% would be

Speaker 4

kind

Speaker 3

of the low end for Q2?

Speaker 1

Yes.

Speaker 3

Okay, fair enough. And then are you able to, Richard, comment on sales comps across the business in the month of March?

Operator

Yes, what we've seen is that we have a the vacation cabinet industry business has decreased by 3.7%. I would say the worst decrease come from the residential furniture. In Eastern Canada, for example, the residential furniture has decreased by 15%. So I think the people making residential furniture, as we speak, have a hard time. So basically, this is the toughest market that we're dealing with.

Operator

And I would say, we have a market that is still sustaining good like the middle work, which we call a commercial innovation, it's higher by 4%, and so it's not that bad. And our cash flow is down by 2%. And the retail market as you know is down by 2.7%.

Speaker 3

Okay, fair enough. That's helpful. I'll get back in the queue for now. Thanks a lot.

Speaker 2

Your next question comes from Zachary Evershed from National Bank. Please go ahead.

Speaker 4

Thank you for taking my questions and sorry to hear you're not feeling well, Richard.

Operator

But I feel pretty good. It's only a cold. It takes more than that, just to put me down.

Speaker 4

Perfect. So organic growth was only marginally negative in the quarter. Would you say that end market demand is recovering more quickly than you anticipated at the beginning of the year?

Speaker 1

It's Antoine. It's Antoine, Zack. It's still soft, but what you need to understand is that when we compare ourselves with Q1 2023, Q1 2023 was equal to 2022. So it's still very healthy out there. So we think that we're more conservative on the first half of the year, but we think that the second half could be stronger than the first half.

Speaker 1

In the market situation that

Operator

we know, I think achieving the sales we have achieved, I think it's pretty good. I think we performed very well for the market and nutrition. I think our people are out there doing their job, selling the products and promoting and what's about to be done. And we think in the circumstances, we think that these results are very, very good.

Speaker 4

Thank you. And then, you identified inventory costs as being a $3,500,000 drag in the quarter. When do you expect to work through the remaining high priced inventory?

Operator

We have to reorder all the products. So, basically, we have started we think that starting in the Q3, we're going to see a substantial improvement. But unfortunately, for the financial statement, as you understand with the IFRS, we have to work with the average cost. So if we buy a new product with 10% less regarding the cost compared to the cost that we had before, that means that the 10 the economy is not going directly into the gross margin because we have to work with the average cost. But basically, things will improve.

Speaker 4

Got you. Thanks. And then if we look at the operating expenses related to expansion projects, those are categorized as temporary in your press release. Does that mean that your fixed cost absorption is temporarily low while you're ramping up volumes Or are there specific items that you won't be paying for in the near future?

Speaker 1

You're right. Your first comment is pretty much the one. So of course, we have some moving expenses in there, but the main reason is that the fact that we're in ramping mode. So it takes some time to absorb the fixed costs. So, it had an impact of over $2,500,000 in the EBITDA for the quarter.

Speaker 4

Thank you. That's very clear. Appreciate that. And then, given your anticipation of an improving H2 versus some of the forecasts that we're seeing for an overall declining market in repair and renovation in the U. S?

Speaker 4

How do you feel about your current installed capacity, the amount of distribution centers you have in the U. S?

Speaker 1

I think the network, with all the investments that we've done in the network, I think we're there to capture this effect that we're in good shape. On that front, we are in good shape.

Speaker 4

Thank you very much.

Speaker 2

And there are no further questions at this time. I will turn the call back over to Richard L'Oreal closing remarks.

Operator

So, if there's no more question, thanks to all of you again. We're always pleased to talk to you if you have the desire to call us. Bye bye.

Speaker 2

Ladies and gentlemen, this concludes your conference call for today. You may now disconnect your lines. Thank you.

Powered by Quartr
Earnings Conference Call
Richelieu Hardware Q1 2024
00:00 / 00:00