Richelieu Hardware Q2 2024 Earnings Call Transcript

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July 11, 2024

There are 5 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the Q2 and first half ended May 31, 2024. With me is Antoine Ocalais, 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. We continue to make good advances in the second quarter, thanks notably to the valuable contribution of our acquisitions, the strong support of our market development strategy and our value added service. As a result, achieved an increase in sales over the competitive quarter of 2023, which is appreciable in the current market condition.

Operator

This rise reflects the good performance in our manufacturers market, especially in the U. S. With a growth of 8.7% in the quarter. Our sales to retailers and renovation superstores were done in Canada and U. S, resulting from a softer market and the impact of some price reduction.

Operator

Nevertheless, we are currently working on many interesting projects with retail customers that will generate additional sales in the coming periods. In addition, the centralization projects in Western and Eastern Canada will continue to support our growth in this market. We also focus on the ramp up and development of our centers that we were expanding and modernizing in 2023. We are happy with these investments that were implemented to better service our customers, support our growth and access new territories. We already see significant increase in sales versus last year in all of these projects.

Operator

I now hand it over to Antoine for the financial review of the quarter and first half.

Speaker 1

Thanks, Richard. 2nd quarter sales reached $407, 000, 000 up 2%, resulting from a positive contribution from the acquisition of 2.7% and an internal decrease of 0.7%. In Canada, sales amounted to $276, 000, 000 down 1.1 percent of which 2.8 percent from internal decrease, partially offset by a 1.7% positive contribution from acquisitions. Sales to manufacturers reached $232, 000, 000 up 0.9 percent and for the hardware retailers, sales stood at $44, 000, 000 down 10.6%. In the U.

Speaker 1

S, sales grew to $150, 000, 000 in U. S. Dollar, up 6.1%. Sales to manufacturers reached $143, 000, 000 in U. S.

Speaker 1

Dollar, up 8.7%. In hardware retailers and renovation superstores market, sales reached $7, 400, 000 down 2, 900, 000 dollars In Canadian dollars, total sales in the U. S. Reached $205, 000, 000 an increase of 6.5%. For the first half, sales reached $888, 000, 000 up 1.5 percent of which 0.5% from internal decrease offset by 2% from acquisition.

Speaker 1

In Canada, sales reached $508, 000, 000 slightly down by $2, 100, 000 or 0.4 percent, of which 2 point 2% from internal decrease and 1.8% from acquisitions. Sales to manufacturers reached $420, 000, 000 up $4, 300, 000 or 1%. Sales to hardware retailers and renovation superstores reached $88, 200, 000 compared to $94, 600, 000 down 6.8 percent. In the U. S, sales amounted to $280, 000, 000 in U.

Speaker 1

S. Dollar, up 4%, of which 1.7% from internal growth and 2.3% from acquisition. They reached CAD380 1, 000, 000, up 4.2%, accounting for 43% of total sales. Sales to manufacturers totaled US264 million dollars an increase of US13.5 million dollars or 5.4 percent, of which 2.9% from internal growth and 2.5% from acquisitions. Sales to hardware retailers and renovation superstores were down 14% compared to last year.

Speaker 1

2nd quarter EBITDA reached $53, 800, 000 down $7, 700, 000 or 12.6 percent over last year. Gross and EBITDA margins continued to be under pressure due to temporary factors, including inventories at higher than current purchasing costs, lower selling price for certain product originating mainly from Asia, plus the temporary impact resulting from the expansion projects. Consequently, EBITDA margin stood at 11.2% compared to 13% last year. First half EBITDA reached $94, 200, 000 down 14.8 percent. As for the EBITDA margin, it stood at 10.6% compared to 12.6% last year.

Speaker 1

2nd quarter net earnings attributable to shareholders totaled $23, 400, 000 down 23.7%, mainly due to amortization resulting from new business acquisitions and expansion projects. Net earnings per share were $0.42 compared to $0.55 last year, a decrease of 23.6%. First half net earnings attributable to shareholders reached $38, 700, 000 down 27.2%. Diluted net earnings per share stood at $0.69 compared to $0.95 last year. Cash flows from operating activities before net change in non cash working capital balances was $45, 100, 000 compared to $50, 800, 000 last year.

Speaker 1

Net change in non cash working capital items generated a cash inflow of $10, 700, 000 Inventories continued to reduce as planned with a positive effect of $22, 000, 000 this quarter. As a result, operating activities provided a cash inflow of $55, 700, 000 in the quarter compared to a cash inflow of $74, 400, 000 in 2023. For the first half, cash flows from operating activities represented a cash inflow of 56 $200, 000 compared to a cash inflow of $93, 200, 000 last year. For the 2nd quarter, financing activities used cash flow of $38, 600, 000 compared to $17, 800, 000 last year. During the quarter, the Corporation paid lease obligation of 10, 000, 000 dollars distributed dividends of $8, 400, 000 and paid interest on bank overdraft of $700, 000 During the quarter, we also repurchased 481, 000 common share for $18, 600, 000 First half financing activities used cash flow of $57, 600, 000 compared to $29, 800, 000 in 2023.

Speaker 1

During the first half, we invested $36, 200, 000 dollars 17, 000, 000 for the 3 business acquisition and $19, 200, 000 primarily for investments related to the consolidation of our new Calgary warehouse and the purchase of equipment to maintain and improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of $616, 000, 000 for a current ratio of 3.3:one and almost no debt. I now turn it over to Richard.

Operator

Thank you, Antoine. First, I'd like to say something about the situation in our Montreal warehouse, where last month some 125 employees with collective agreement expired last December went on strike. We have taken appropriate measures to ensure that all our local customers continue to be served, thanks to the contingency plan we have put in place. It has to be noted that the strike affects just 1 of our 114 distribution centers and a small portion of our 3, 000 employees. We are confident that a mutually beneficial agreement will be reached very soon.

Operator

To conclude, we continue to focus on the development of our expanded and modernized distribution centers in the U. S. As well as our new Calgary location, which enables us to effectively support growth of our manufacturers market in addition to centralizing the distribution of all products for retailers in Western Canada. As well, we will pursue our projects undertaken in the Q2 regarding the consolidation of our distribution activity for retailers in Ontario and Eastern Canada. We are well positioned to seize new opportunities in the renovation market and to benefit from the expected increase in demand in the context of the housing shortage in Canada and in the U.

Operator

S. Our focus is on profitable growth. This means keeping tight control of our cost and pursuing our winning strategies of innovation, service and acquisition. Thanks everyone. We'll now be happy to answer your question.

Speaker 2

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

Speaker 3

Hi, good afternoon. Richard, are you able to share how your year over year sales are tracking in Q3 to date for both manufacturers and retailers?

Operator

Yes. Let me get my report. I have that not very far from me. Regarding the kitchen cabinet market, we are flat compared to last year, which is a positive sign. Kitchen cabinet manufacturers represent about 20% of our sales.

Operator

Interesting to mention that the commercial renovation, which consists of the Midwerk and commercial projects, is increasing by in total by 4.3%, including 6% in the U. S. That's very positive. Other specialized market that is including the what we call the closet market here, we're up by 5% all over North America. So it's pretty positive and we see the downside though on the door and window manufacturers, which is typically related to the new construction and the residential and office furniture that are down for many reasons that we know about the office furniture maybe because of the people working from home.

Operator

So basically, these are positive signs that our manufacturers market is behaving quite well. The retailers, as a matter of fact, remains down, but we expect this market to improve because of the many projects that we have undertaken with many of our retail customers. We have new products that came out in the Home Depot stores in Canada 3 months ago. We have new projects with Home Depot that will be delivered next fall, I mean, October, November, many new projects with Rona. Now that Rona, you know that they have a new executive that has taken place, a new President, new Vice President.

Operator

So basically their mandate is to revive that company that has been, I would say, sleeping for a few years because of what you knew that Lowe's wanted to sell its operation in Canada. So basically, we have many positive signs that give us a clear demonstration that the future looks great with the retailers in Canada. In the U. S, unfortunately, our sales are down because we have lost 1 customers, but we are in the process of compensating those sales those lost sales with new customers. What happened with the customers I'm talking about is because they have decided to buy their own products overseas.

Operator

That's their choice. We don't think it's a good choice, but this is what they have decided. But we think before the end of the

Speaker 1

year, we should have recaptured that business with other customers. And Amir, that's pretty much what we're seeing since the beginning of Q3 as well. So the trend is pretty similar so far.

Speaker 3

Okay. Thanks, Antonio. And Richard, that customer you mentioned that you lost in the U. S, that was a retailer customer?

Operator

Yes, yes, a retail customer, yes. Was talking about the retail market, yes.

Speaker 3

Perfect. And all the figures that you ran through, appreciate all that. Was that organic or is that kind of

Operator

Organic only, organic only. No, not including any acquisitions.

Speaker 3

Okay. That's very helpful. And then Richard, just turning to in Q2, you had a 0.7% organic decline. How much of that was weaker volumes and how much was maybe some price deflation because I know you highlighted pricing on products from Asia were down a bit?

Operator

I will let Antoine try.

Speaker 1

Yes, if you go a bit more in detail, if you look at the reduction in the retail business in Canada, it's pretty much coming all of it from price reduction. The rest, we have some price reduction in the Industrial business, but not necessarily material. But the 1 big ticket item regarding price reduction, it's the retail business in Canada, and it's pretty much all coming from there.

Operator

And mainly for the product that we are importing from Asia.

Speaker 3

Okay. So the volumes were pretty stable year over year?

Operator

Yes. In quantity of products sold, it's stable.

Speaker 3

Okay. And then Richard, as you look out over the next 18 months, I know Asia is a small piece of your product mix, but are you seeing any signs of perhaps upward price momentum, because I think for most of your products there hasn't been any price increases for some time?

Operator

You're absolutely right and the operating costs continue to increase, the salary will continue to increase as well as the price of the rents, the leases that we have to pay. I feel that the market will start to increase its pricing, mainly the product from Europe and from America should start to increase. We've seen that with the finishing products, the lacquers and what we call the paint for the wood product that we sell. So we had our first price increase last month and expect that the North American products and the European products will start to increase early next year. That's not only our hope.

Operator

I think these guys also have the operating cost increasing and they're going to have to do something. Asia is still slow. The only problem with Asia is that they have not much to do as we speak. So, they don't increase their price, but that could change very quickly.

Speaker 3

And Richard, if you see price increases on the Europe and Asia products, are you getting a sign from your suppliers as to the scale of those increases that they might be looking to realize?

Operator

Not yet. I wasn't meeting with an important customer a couple of days ago, which is Bloom, which is a huge supplier. They have a price increase in mind, but they would not say put any number on the table as we speak. So, basically, I cannot answer clearly that question.

Speaker 3

Okay. Fair enough. That's all I had for now. I'll get back in the queue. Thanks.

Speaker 2

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

Speaker 4

Thank you. Congrats on the quarter, everyone. Thank you. Thank you. In terms of the rationalization, the cost base that you guys are entertaining in Eastern Canada and Ontario, Could you give us a breakdown of the cost savings that you're expecting perhaps by bucket?

Operator

Cost savings is important. I will let Antoine answer that question. But I would let's say, I would like to make a few comments regarding the effect on our customers, because what we are doing, we are centralizing some distribution centers that are mainly servicing the hardware retailers. In the retail market, you should have got something like 6 different product lines, which as we speak have distributed through 6 different warehouses because we have these are the result of money acquisition that we've made in the past. So when we centralize that, what we do for the customers, for the small customers, because at the retail business, we sell to a owner, for example, to Home Depot and Home Hardware and those customers, they buy through their distribution centers, which is easy, can be shipped from any warehouse.

Operator

But for the small customers that want to make a place a purchase order at Richelieu, we have 6 different products coming from 6 different warehouses. That means that we have 6 different prepaid. In order to have their freight for free, they have to buy $500 each of the product line, so which is a burden for the small customers. So, now since we combine everything at the same place, the same prepaid order, dollars 500 applies for all the products. So, that will create more sales because the customers, they don't have that benefit from others or from our competitors and it will make their life easier in order to manage their stores and we will save money as we will because while combining those distribution centers, we save on operating costs and we save on the product handling and everything else because we still use the same sales force.

Operator

The difference would be in the labor force in the warehouse.

Speaker 1

Regarding cost reduction, Zach, we talking about close to $1, 500, 000 in terms of reduction in costs and another $1, 500, 000 when we'll be able to exit the location that we're in. So that should be happening before now and the end of the year. So we're close to 3, 000, 000 dollars Next year.

Speaker 4

And those are annual numbers, not quarterly, right?

Speaker 1

Yes, annual numbers.

Speaker 4

Perfect. And then would you be able to quantify the dollar impact of the strike in Montreal or would it not be material?

Operator

We don't think it would be material. We don't have any first of all, as I said that it would be fixed very shortly. And we don't see that should be very detrimental to our sale because we the contingency plan is very effective. And we have used our Mississauga, our Ottawa, our Quebec, our Mountain and Nova Scotia warehouse in order to continue to serve our customer effectively. The non unionized people here were working in the warehouse in Montreal.

Operator

They did a fantastic job. These guys are efficient. They have learned really fast how to do the job and it was amazing to see the auto store and the conveyors running and getting the boxes out of that warehouse. So, we don't expect any huge benefit, but it's still early to evaluate all the impacts. Antoine, what do you think?

Speaker 1

No, no, you're correct. We were monitoring the lines shipped all across our network, so versus what we were shipping before. So we haven't seen major

Operator

helpful. Thanks

Speaker 4

That's helpful. Thanks. And then my line did cut out for a moment, so apologies if this has already been asked. But have your expectations for margin levels for 2024 changed at this point in time?

Speaker 1

So as you can see, the second quarter is pretty aligned with the Q1. The gap between the EBITDA margin last year reduced in the second quarter. So it's going to reduce as well in the 3rd and the 4th quarter. It's going to improve. The second half should be better than the first half, that's for sure.

Speaker 1

And next year, if when we're going to see the market coming back, we should also see an improvement in margin if the market is improving.

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Richelieu Hardware Q2 2024
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