Richelieu Hardware Ltd. (RCH) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Fourth Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded on January 19, 2023. [Foreign Language]

[Foreign Language]. Thank you. Good afternoon, ladies and gentlemen, and welcome to the Richelieu conference call for the fourth quarter and 12-month period ended November 30, 2022. With me is Antoine Auclair, CFO. As usual, note that some of today's issue include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings. First, let's look at our fourth quarter where our sales benefited from both acquisitions and internal growth. The sales increase was driven by a strong performance in the manufacturers market in the U.S. where the 2 acquisitions closed in the first quarter made a major contribution. Namely, Compi Distributor, HGH Hardware and National Builders Hardware. Jointly they operate 9 distribution centers in 6 different states. As for the retailers and innovation superstores market, sales remained stable over the last year. We closed our fourth acquisition of the year in September, Quincaillerie Deno, a specialty hardware distributor operating 1 distribution center in Montreal. Together, the four acquisition closed in 2022 represents additional sales of approximately $125 million on an annual basis. As for 2022, it was another year of sound growth fueled by both internal growth and acquisitions. We are very pleased with the performance achieved in all our markets, especially in U.S. where the growth was 42.2%, now representing 40% of our total sales. Our innovation and acquisition strategies are focused on customer service the diversification of our market segments and our successful website, richelieu.com, all these trends contributed to their foot and be our best growth levers. I'm also pleased to announce that the Board of Directors approved this morning, a rise of 15.4% in our quarterly dividend to $0.15 per share. Antoine will now review the financial highlights, and I will conclude with the latest development and outlook.

Thanks, Richard. Our fourth quarter sales reached $458 million, up 14.9%. Sales to manufacturers stood at $398 million, up 17.4% of which 7.8% from internal growth and 9.6% from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of $60 million in line with 2021. In Canada, sales amounted to $274 million, an increase of $13.4 million or 5.2%. Our sales to manufacturers reached $226 million, up 5%. As for retailers market, sales stood at $47.5 million, up 5.8%. In the U.S., sales totaled USD 136 million up 24.1%, of which 2.8% resulting from internal growth and 21.3% from acquisitions. Sales to manufacturers reached USD 127.5 million up 29.4%. In the retailers market, sales were down by USD 2.5 million. Total sales in the U.S. reached CAD 184 million, an increase of 33.2%, representing 40.2% of our total sales. Total sales in 2022 reached $1.8 billion, up 25.2%, of which 13.4% from internal growth and 11.8% from acquisitions. Sales to manufacturers reached $1.6 billion, up 28.9%, of which 15.9% from internal growth and 13% from acquisitions. These increases are the result of sustained demand in the renovation market in 2022 as well as higher selling price. Sales to hardware retailers grew by 6.3% or $14.9 million to $251.5 million, mostly from acquisitions. In Canada, sales totaled $1.1 billion, up 13.7%, of which 10.3% from internal growth and 3.4% from acquisitions. Our sales to manufacturers amounted to $877 million, up by 14.2% of which 11.7% from internal growth and 2.5% from acquisitions. Sales to hardware retailers and renovation superstores were $177 million, up 11.7%. In the U.S. sales amounted to USD 562.5 million, up 42.2% of which 15.4% from internal growth and 26.8% from acquisitions. We reached CAD 728 million, up 46.9% accounting for 40% of total sales. Sales to manufacturers reached USD 521 million, an increase of 49.7% and sales to hardware retailers were down by 12.9%. Fourth quarter EBITDA stood at $76.7 million compared with $71.3 million last year, up 7.5%. The EBITDA margin stood at 16.8%. For the year, EBITDA was $287.4 million, up 22.6% and EBITDA margin stood at 15.9%. Fourth quarter net earnings attributable to shareholders totaled $44.9 million compared with $44.6 million last year. Diluted net earnings per share reached $0.80 compared with $0.79 in 2021. For the year, net earnings reached $168 million, an increase of 18.8% and $2.99 per share compared with $2.51 per share last year. Fourth quarter cash flow from operating activities before net change in non-cash working capital balances were up 8.3% to $60.4 million or $1.07 per share. Net change in non-cash working capital balances used cash flow of $58.6 million. For the year, they were up 22.7% totaling $224 million or $3.98 per share. Net change in non-cash working capital balances used cash flow of $260.7 million, mainly from spike in inventory which resulted from the higher product cost and the easing of the supply chain challenges, including the acceleration of delivery times, especially from Asia. During the year, we paid dividends of $29 million, up 50% over 2021, of which $7.3 million were in the fourth quarter and repurchased common share for $12.3 million. We have thus distributed to a total of $41.4 million to our shareholders this year. We also invested $67 million during the year, of which $44 million was for business acquisitions and $23 million for equipment to maintain and improve operational efficiency, including investment in ongoing expansion projects. As at November 30, 2022, bank overdraft net of cash amounted to $112 million. Our working capital was $563 million for a current ratio of 2.6:1 and the return on average shareholders' equity stood at 22.7%. I now turn it over to Richard.

Thanks Antoine. We are constantly looking to acquire new businesses in line with our criteria and integrate them by sharing our value and developing synergies. Just recently, in January, we concluded 4 new acquisition that will contribute to diversify our offering and our customer base, namely Quincaillerie Rabel, a distributor of specialty hardware with 1 distribution center in Terrebonne, Quebec. Trans-World Distributing, a distributor of industrial fastener with 1 distribution center in Dartmouth, Nova Scotia. Unigrav and Usimm, 2 companies offering custom products, including 3D scanning centers for the architectural and industrial markets. They are located, respectively, in Drummondville and Montreal. These 4 new acquisitions will add approximately $18 million in sales on an annual basis. Our expansion projects are progressing well, mainly in Atlanta, Fort Myers, Nashville and Pompano. Also, we just opened our new Carlstadt location closed to New York City. And we will be up and running in Minneapolis for February. As for Chicago, our new location servicing retailers will be fully operational in the coming weeks. Other expansion projects are currently under review and U.S. sales will continue to be a strong driver of our growth. To conclude, Richelieu, has strong financial foundation, skills and expertise to serve its customers with a distinctive service approach. As well, we have a solid track record in product innovation and business acquisitions which remain our 2 main growth drivers. In 2023, we've continued to build on this momentum and our strength in order to achieve good results with the involvement of our great team. We will pursue our market development innovation and acquisition strategies while giving priority to service, productivity, synergies and sound financial management. Thanks, everyone. Now we'll be happy to answer your questions.

Thank you, Mr. Lord. [Operator Instructions] And your first question will be from Zachary Evershed at National Bank Financial.

Congrats on the quarter. So I was hoping you could give us a little bit more color on the inventory breakdown, maybe paint a picture for us of where you want to get that number down to? What's higher due to pricing and then what's attributed to new distribution centers and acquisitions in your inventory?

Yes, Zach, I will answer that one. The -- basically, just product cost increase amounts to approximately $45 million to $50 million just from the cost increase. And $30 million from acquisition and new extension, basically -- so basically includes the $75 million on those elements. But we're pretty much at the highest point. In January, we're pretty much at the highest point. So you looked at the -- you have the November levels, it's going to increase in the December slightly increase in January as well. We're going to be at the top of the mountain in January, stabilized in February, and then it will go down substantially during 2023.

And how much do you think you can tear away to get to a stabilized inventory level?

Between, I would say, between $60 million to $80 million.

That's helpful. And then, Richard, maybe you could give us some commentary on pockets of weakness and strength that you're seeing in your end markets and product categories?

What we see so far, market is still quite good, even though the first quarter is always our lowest quarter, as you can remember. But also what we have seen this year more than ever than a small customer until January 15, there were still on vacation. But in spite of that, our sales do quite well. It's going to be hard. I don't think we can beat the performance that we had last year, though. But the market is still good. We see the retail market being flat. We were slightly down in the U.S., but it's only for timing, purchasing -- purchasing of timing for our customers. And speaking with our sales management and our salespeople, we see that our customer will be busy for at least the next 6 months to a very decent level. So basically, all the product lines are doing pretty well so far as well as most of our customer segment. And also, I think our new acquisition will also contribute to a nice growth because now they have access to more products. They have to access to the Richelieu's strength and Richelieu marketing strengths. So basically, that should generate more sales. And we have various program in order to increase our sales as usual in U.S. as in Canada in order to get more sales per customers and gain more new customers as well. So basically, whatever the circumstances might be or will be, Richelieu is still doing everything in terms of many strategy in parallel in order to keep increasing our sales.