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

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

Thank you, Mercy. Good afternoon, ladies and gentlemen, and welcome to Richelieu news conference call for the second quarter ended May 31st and first half of 2023. With me is Antoine Auclair, our 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. In the second quarter, we achieved good results and ended the period with a strong position, building on our major strengths, namely our multi-access value-added service concept and our ongoing acquisition strategy. The comparison with the second quarter of 2022 shows a decrease in sales and earnings, but it should be remembered that the first half of 2022 was particularly favored by exceptional increases in a market context resulting from the pandemic. To put things in perspective, if we compare second quarter of 2023 to the same quarter in 2019, sales increased by 68% and EPS by 67%. During the quarter, we completed 2 acquisitions in the U.S., one in Oregon, Maverick Hardware in Eugene. The other one in Minnesota, Westlund Distributing in Monticello, 2 compatible specialty hardware distributors, who extend and strengthened our presence in this market. That makes 6 acquisitions since the start of 2023, adding some $26 million in annual sales. In addition, we opened a new distribution center in Minneapolis, and continue to make progress with our expansion and modernization projects at our Atlanta, Nashville, Seattle and Pompano centers, which we expect to complete very soon. This will add some 500,000 square feet to our U.S. network. From a total of 115 interconnected distribution centers in North America, we now operate 62 in the U.S. which accounted for 42% of our total sales in the first half of 2023. Antoine will now review the financial highlights of the quarter and first half. Then I will conclude, and we will make -- and we will take your questions.

Thank you, Richard. Second quarter sales reached $172.4 million, down 3.2%, of which 4.7% from internal decrease and 1.5% from acquisitions. It's important to note that in the second quarter of 2022, Richelieu Hardware achieved exceptional internal growth of 16.1% including a 22.7% increase in the U.S. In Canada, sales amounted to $279.5 million, down 4.3%, of which 6.4% from internal decrease, partially offset by a 2.1% positive contribution from acquisitions. Our sales to manufacturers reached $229.9 million, down 3%. And for the hardware retailers, sales stood at $49.6 million, down 9.8%. In the U.S., sales grew to $141.9 million in U.S. dollar, down 7.9%. Sales to manufacturers reached $131.3 million in U.S. dollar, down 7.2% -- 7.2%, sorry. In the hardware retailers and renovation superstores market, sales reached $10.6 million. In Canadian dollar, total sales in the U.S. reached $192.6 million, a decrease of 1.6%. For the first half, sales reached $875.1 million, up 0.3%, of which 1.8% from internal decrease and 2.1% from acquisitions. In Canada, sales reached $510.4 million, down $11.2 million or 2.1%, of which 3.9% from internal decrease and 1.8% from acquisitions. Sales to manufacturers reached $415.4 million, down $7.3 million or 1.7%. Sales to hardware retailers and renovation superstores reached $95 million compared to $98.9 million, down 3.9%. In the U.S., sales amounted to $269.6 million in U.S. dollar, down 2.4%, of which 4.8% from internal decrease and 2.4% from acquisitions. [ They reached ] $364.7 million in Canadian dollar, up 4%, accounting for 42% of total sales. Sales to manufacturers totaled $249 million, a decrease of $2.2 million or 1.3%, of which 3.9% from internal decrease and 2.6% from acquisitions. Sales to hardware retailers and renovation superstores were down 13.8% compared to last year. Second quarter EBITDA reached $61.5 million, down $16.3 million or 21% over last year, resulting from lower sales and to overall operating expenses returning closer to pre-pandemic level as well as additional external storage expenses due to temporary increased level of inventories. Gross margin remained stable, and the EBITDA margin stood at 13% compared to 16% last year. First half EBITDA reached $110.6 million, down 16%. As for the EBITDA margin, it stood at 12.6% compared to 15.1% last year. Second quarter net earnings attributable to shareholders totaled $30.7 million, down 25.6%, mainly due to amortization of right-of-use assets increased resulting from new business acquisition and expansion projects, mainly in the U.S. as well as higher interest expense on bank overdraft. Net earnings per share were $0.55 compared to $0.84 last year, a decrease of 34.5%. First half net earnings attributable to shareholders reached $53.1 million, down 25.6%. Diluted net earnings per share stood at $0.95 compared to $1.37 last year. Cash flow from operating activities before net change in noncash working cap balances was $48.4 million compared to $60.7 million last year. Net change in noncash working capital items represented a cash inflow of $23.6 million. Excess inventory started to decline with a positive effect of $49.2 million. As a result, operating activities represented a cash inflow of $72 million in the quarter, compared to a cash outflow of $3 million last year. For the first half, cash flows from operating activities represented a cash inflow of $88.4 million compared to a cash outflow of $40.5 million last year. For the second quarter, financing activities used cash flow of $15.4 million compared to $21.5 million last year. Dividends paid to shareholders of the corporation amounted to $8.4 million compared to $7.3 million in the same period of 2022. First half financing activities used cash flow of $35.1 million compared to $29.8 million in 2022. Dividends paid to shareholders amounted to $16.7 million compared to $14.6 million last year. During the first half, we invested $34.3 million for 6 business acquisition and $14.3 million for the purchase of equipment to maintain and improve operational efficiency as well as for network expansion projects. We continue to benefit from a healthy and solid financial position with a working capital of $586.2 million for a current ratio of 2.9:1 and an average return on equity of 18.2%. I now turn it over to Richard.

Thank you, Antoine. In this transition year, we are actively working in reducing our inventory levels. Therefore, reducing additional external warehousing space that is impacting our performance. In addition, 2023 is a year of significant investment in our network, and these investments will start to bear fruits in 2024. We will remain focused on market penetration, synergies with our recent acquisition and our innovation, value-added service and acquisition strategies to deliver good results in the coming quarters. We'll continue to seize and create opportunities. We have the team, the strengths and the asset to consolidate our North American leadership and deliver solid growth over the next period. Thanks, everyone. We'll now be happy to answer your questions.

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

Richard, are you able to quantify how much the cost of carrying that excess inventory weighed on your EBITDA margins in the quarter? And when do you expect inventories to normalize?

I will let Antoine complete the answer. But just to -- the first lens though, the outside [ warehousing ] cost is costing as we speak, about $3 million per year. That's just.

$4 million per quarter...

$4 million per quarter, sorry, yes. And plus the other expenses related to the back and forth of the merchandise that we have to carry between the different warehouses.

And we can add to that also the interest on the bank overdraft. So we're talking about over $6 million per quarter just for -- to carry these additional inventories. And to answer the second part of your question, Hamir, basically, the inventory started to decline. So we're starting to reduce the excess. We gave -- we told you guys that the inventory should reduce between $60 million to $80 million this year, and we should see another $50 million next year to bring us more -- to a more reasonable level of inventories.

Okay. Antoine, and then with respect to EBITDA margins, I know in the past, you've kind of put out some commentary around where you see that longer-term figure going. Just given how much the margins pulled back in this quarter, where -- once you through this inventory carrying costs, where would you expect your EBITDA margins to stabilize that?

Yes. This year, we should be able to close the year at around 13% EBITDA. It all depends, of course, Hamir, of the volume of business. But once we clean up the inventory and we reduce the additional external warehousing, we should be anywhere between 13% and 14%.

Yes, 13%, 14%. Okay. That's helpful. And then just with respect to the quarter itself, given you're carrying this warehousing cost, is it -- how much pricing declines did you experience in that 4.7% organic decline in the quarter?

We have not experienced any price decline as such. But sometimes for certain items in inventory, we made temporary promotion. So basically, yes, we -- it does affect our margin, but we don't have any specific prices decrease as such.

Okay. Fair enough. And just the last question I had was -- Antoine, are you able to update us on how the margins at your U.S. locations today compare to the margins at the Canadian assets?

It's approximately 75% of the Canadian margins.

And it keeps improving.

Okay. No, that's helpful. And Richard, just given all the modernization initiatives, where do you -- what's the goal for lifting that 75% in coming years?

The goal is to increase our sales in the U.S. We have a good performance [ project ] with our managers in the U.S. So basically, sales should increase because every one of those investment have been justified because of sales increases because of the market need because we needed that basically to continue our growth in the U.S. So we -- and those new investments so far, Antoine, are costing what on a yearly basis? Something like $8 million to $10 million?

Yes.

And next year, we should see the benefit to cover the cost of this.