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

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware First Quarter Results Conference Call. [Operator Instructions] This call is being recorded on April 6, 2023. [Foreign Language]

[Foreign Language] Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the first quarter ended February 28, 2023. 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. We started 2023 with good results for the first quarter, and we are pleased to have seized new acquisition opportunities as we completed 4 transactions in Canada earlier this quarter and 1 in the U.S. on April 3. It's important to note that the comparative numbers of 2022 were exceptionally strong, benefiting from the business context resulting from the pandemic. Just in the first quarter of last year, sales increased by 29.2% and EBITDA by 40.8%. In the first quarter of 2023, our sales increased by 4.8% or $18.5 million, including 1.8% organic growth and 3% from acquisition to $403 million. We are also proud to mention that our U.S. sales now represent 43% of our total sales. With the acquisition of Quincaillerie Rabel, Trans-World Distributing, Unigrav and Usimm in January 2023, we strengthened our presence in Eastern Canada. And after the end of the quarter, we completed the acquisition of Maverick Hardware in Eugene, Oregon, which reinforced our presence in this market, where we already operated a distribution center in Portland. With these 5 acquisition, we add $22 million in annual sales. new customers, complementary products and things that are experienced in their market. The expansion, modernization and opening of centers in the U.S. have progressed well, including Atlanta, Nashville, Pompano, Seattle and Chicago. We moved our Fort Myers operation in a brand new building and our new location in Carlstadt, New Jersey and Minneapolis are now open for business. In addition, by the end of the year, we will consolidate 2 centers in the Calgary area, in which we will include our first-class showroom while increasing our service capacity in Western Canada. Following these recent developments, we are now operating 113 interconnected centers, 50 in Canada, 60 in the U.S. plus 3 manufacturing facilities in Canada. Antoine will now review the financial highlights of the quarter, and then I will conclude and we'll take your questions.

Thanks, Richard. First quarter sales reached $403 million, up 4.8%, of which 1.8% from internal growth and 3% from acquisitions. In comparable currency to the first quarter of 2022, total sales growth would have been 2.2% for the quarter. Sales to manufacturers stood at $344 million, up 5.4%, of which 2% from internal growth and 3.4% from acquisitions. In hardware retailers and renovation superstores market, we achieved sales of $59 million, up $0.8 million or 1.4%. In Canada, sales amounted to $231 million, same as last year. Our sales to manufacturers reached $185.5 million and hardware retailers and renovation superstores market, sales stood at $45.4 million, up 3.4%. In the U.S., sales grew to USD 127.7 million, up 5%, all from acquisitions. We reached CAD 172 million, an increase of 11% and represented 42.7% of total sales. Sales to manufacturers reached USD 118 million, up 6.2%; 0.7% from internal growth and 5.5% from acquisitions. In hardware retailers and renovation superstores market, sales were down 10.6% from the corresponding quarter of 2022. First quarter EBITDA reached $49.1 million, down $4.6 million or 8.6% over the first quarter of 2022. Gross margin remained stable, and the EBITDA margin was 12.2% compared to 14% last year. First quarter net earnings attributable to shareholders totaled $22.4 million, down 25.6%. In addition to the fact that 2022 first quarter was a period where our financial results were especially strong. The factors that also affected our results were mainly the return of operating expenses closer to pre-pandemic levels as well as outside warehousing costs due to temporary inventory increase, amortization and costs related to our U.S. expansion projects as well as the interest paid on the line of credit. Diluted net earnings per share was $0.40 compared to $0.53 last year. First quarter cash flow from operating activities before net change in non-cash working capital balances was $38 million or $0.68 per diluted share. The net change in non-cash working cap used cash flow of $22 million, mainly reflecting the decrease in accounts payable and tax payable, while accounts receivable represented a cash inflow of $8.4 million. As a result, operating activities represented a cash inflow of $16.5 million compared to a cash outflow of $37.5 million in Q1 2022. Regarding our inventory position, as indicated last January, inventory levels stabilized in February and started to decrease thereafter. We paid dividends of $8.4 million to shareholders, and we invested $22.3 million, including $15.8 million for four business acquisitions and $6.5 million in CapEx. At the end of the quarter, financial situation was healthy and solid with working capital of $564.9 million and an average return on shareholders' equity of 21%. I now turn it over to Richard.

Thank you, Antoine. We are confident we will cease and create new short- and long-term growth opportunities and deliver solid future results. We stay alert and are monitoring market conditions while keeping a disciplined approach in cost control. We will build our strengths with the exceptional quality of our team, the distinctive quality of our service our ability to innovate, to pursue strategic acquisitions and to integrate them efficiently, while using our flexibility to adapt to changing market conditions. Richelieu remains customer innovation, service and results oriented. Thanks, everyone. I'd now be happy to answer your questions.

[Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets.

Could you comment on how demand has fared in March for the -- both on the manufacturer side and retailers segment?

Yes, the demand for the month of March, as we speak, was high single digit down, which is still a very good performance considering that last year for the same month we had an increase of -- remember that Antoine...

18%.

18% for the month of March, organic growth. So basically, we compare ourselves with the best month ever. The last month of March 2022 was our best month ever in this company. So we sold something like $130 million. So basically, we're quite satisfied with the current sales performance in spite of seeing a high single digit decline on sales. But in the circumstances, we still think it's really good.

That's helpful. And the high single digit decline, how much of that is price versus volume?

Nothing. We have not seen any price [ deflation ] We've managed the business to make sure that our pricing was stable for the quarter and for the [ month of March ] as well. So, so far, we didn't see any deflation in our pricing.

And Richard, you only look back in recent years, there's been quite a big increase in organic growth. I don't know if you have the figure on-hand, but do you have a sense as to from the sort of beginning of the pandemic, early 2020, how much price inflation you've seen through your results? And what amount -- what type of deflation would you still expect to play out, just given maybe pass-throughs on freight and some moderation maybe on some products?

[ Deflation ] last year in 2022, I think, was something like 10% due to the price increasing because of what you mentioned for the freight. We see the freight now being -- coming back to normal. But since we don't receive much inventory as we speak because we still have to decrease inventory that we already have on hand with -- which is already a priced at the high cost. But I think all the competitors are -- have to live with the same circumstances. But the sales are still maintaining good, so we expect to turn -- to have 1 turn of our inventory before the -- close to before the end of the second quarter. So things should improve. And also, we have to consider that we price our inventory based on average cost. So basically, it's going to be almost a full year before the costs come back to where it should be as a number of costing. And again, that's not negative because that does apply to any business in the world. We have to deal with the same circumstances. So basically, that's about it.

Okay. That's helpful. And just a final question I had. Antoine, it's been kind of -- with another quarter of visibility. Do you have a sense as to where you would expect EBITDA margins to stabilize? I'm just thinking maybe on a '24 basis.

Low 14%, Hamir.

Low 14%. Okay. That's great. That's all I had for now.

[Operator Instructions] Your next question comes from Zachary Evershed from National Bank Financial.

So you mentioned that March organic growth was down high single digits, but perhaps there's a lower bar in the other months for the quarter since it was an all-time high in March. What are your hopes for the pace of organic growth in the quarter as a whole?

Again, we -- the second quarter last year was very strong in terms of growth as well. So we -- there is no way we were going to match the growth that we had last year. But what we see now, I guess it's the trend that we're going to see for the quarter. Antoine, what would you say about that? The growth was what -- the total?

The second quarter growth last year was 11% in Canada, I'm talking about the internal growth and 23% in the U.S.

It was very strong. So basically, if we maintain the performance that we had in March, I think that's still going to be good. Hopefully, we're going to do better.

Got you. And inventory rose quarter-over-quarter, you're hopeful for a decline this year. Can you give us an update on how that's trending so far in Q2 and where you hope to end the year?

It's the same answer as the one in January, Zach. So increase in December and January stabilized in February, and it started to decrease in March, and the plan is to decrease from $60 million to $80 million.

That's great. Quick questions on your organic expansion projects. For locations where there isn't a showroom in place, how much does it cost to set one up. And do all of your facilities lend themselves to an extra room being used in that way?

Basically, when we make some expansion projects, we have -- we rent more space, and we either improve the showroom or innovate a new showroom. A new showroom which cost something like $250,000. While in the expansion of the warehouse requires some racking. Racking for what a 50,000 square feet warehouse. We're talking about maybe $200,000.

And Zach, in the quarter and, again, the $6.5 million CapEx, you have approximately $2.5 million for all of the expansion that we're talking about, either the new ones or the ones that we're moving.

Okay. That's great color. And then on those expansion projects, what's left to do in the quarters ahead?

We're going to finalize the Nashville one in the -- we should finalize that in the second quarter, going to finalize Atlanta as well, Seattle also we're -- so it's going to -- we're -- a lot of things will be moving in the second quarter. And after that, it should be business-as-usual, if we don't have any more projects.

How do clients generally respond when you consolidate facilities? Is there any loss in relationships there? Does it carry over a while?

No, I think our customer will be happy when we expand our space because they know that we're going to have more production. So very often, we have decorative board panels, for example, which our customers like very much. At Richelieu has that type of product. But because we sell higher-end decorative panels. So -- and our customers are very well attracted by those panels because it does create more value for the product that they sell to their own customers. So basically, it's very positive.

Great. And then just one last one. Gross margins seem stable, no pricing deflation yet. Could you give us more color on the return of operating expenses to closer to pre-pandemic levels? How will that impact margins in future quarters?

I think that's where we should be. In the last 2 years, we've mentioned it. So it was a -- the expenses were very low. People were not traveling, promo expenses was -- were very low. So now it's back in terms of payroll because the cost structure at Richelieu is pretty simple. It's -- we have people and we have locations. So in terms of payroll, where we should be. And regarding the rent, we have all of the new location in place. The rents are increasing, but where we should be. So we are at the level required to maintain the business volume. But in terms of ops cost, in terms of percent, we're still better than where -- what we were before the pandemic.

Richard, there are no further questions at this time. Please proceed with your closing remarks.

So thank you very much for attending this call. So if anybody wants to call us, we're all ready open to talk with you. Thank you very much.

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