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

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware third quarter results conference call. [Operator Instructions] This call is being recorded on October 5, 2023. [Foreign Language]

Mercy, thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter and first 9-month period ended August 31, 2023. With me is Antoine Auclair, CFO. Our third quarter performance reflects the effectiveness of our initiatives to achieve good sales in our Canadian and U.S. market. Sales that are slightly below the third quarter of 2022, which benefited from exceptional market conditions in the pandemic context. For the 9 months to date, we reached sales of $1.3 billion, in line with last year. Our customer-focused business model and our diversified markets in North America are effective assets as are our innovation and value-added service strategies and our business acquisitions, which partly offset the internal decrease in sales compared to 2022. Our EBITDA margin is lower than last year due to the return to pre-pandemic levels of operating expenses, [ exceptional ] external warehousing costs relating to temporary higher inventories level and the cost related to our expansion and modernization projects of some centers in the U.S. in order to accelerate future growth. Our cash flow from operating activities was strong for the third quarter, generating $104 million. Our inventory is currently returning to more normal levels, which contributed to a positive effect on cash flow. We ended the period with a financial position that remains very solid. Antoine will now review the financial highlights of the third quarter and the first 9 months, then I will conclude, and we'll take your questions.

Thanks, Richard. Third quarter sales have reached $192.8 million, down 2.9%, of which 4.6% from internal decrease and 1.7% from acquisitions. It's important to note that in the third quarter of 2022, Richelieu had achieved strong internal growth of 16%. In Canada, sales amounted to $270.1 million, down 3.4%, of which 6.4% from internal decrease, partially offset by a 2.1% positive contribution from acquisitions. Our sales to manufacturers reached $219.9 million, down 3.6%; and for the hardware retailers, sales stood at $50.2 million, down 2.7%. In the U.S., sales grew to USD 141.6 million, down 5.6%. Sales to manufacturers reached USD 131 million, down 6.8%. In the hardware retailers and renovation superstores market, sales reached $10.6 million, up 12.8%. In Canadian dollar, total sales in the U.S. reached $188.9 million, a decrease of 2.3%. For the first 9 months, sales reached $1.3 billion, down 0.8%, of which 2.8% from internal decrease and 2% from acquisition. In Canada, sales reached $780.6 million, down $20.6 million or 2.6%, of which 4.5% from internal decrease and 1.9% from acquisitions. Sales to manufacturers reached $635.4 million, down $15.3 million or 2.4%. Sales to hardware retailers and renovation superstores reached $145.2 million compared to $150.5 million, down 3.5%. In the U.S. sales amounted to USD 411.2 million, down 3.5%, of which 5.5% from internal decrease and 2% from acquisitions. They reached CAD 553.5 million, up 1.7%, accounting for 41% of total sales. Sales to manufacturers totaled $279.8 million, a decrease of $12.6 million or 3.2%, of which 5.4% from internal decrease and 2.2% from acquisitions. Sales to hardware retailers and renovation superstores were down 6.5% compared to last year. Third quarter EBITDA reached $61 million, down $18.2 million or 23% over last year, resulting from lower sales and higher operating expense. EBITDA margin stood at 13.3% compared to 16.7% last year. For the first 9 months, EBITDA reached $171.6 million, down 18.6%. As for the EBITDA margin, it stood at 12.9% compared to 15.7% last year. Third quarter net earnings attributable to shareholders totaled $29.8 million, down 34.6%, mainly due to amortization resulting from business acquisitions and expansion projects, mainly in the U.S. including higher interest expense on lease obligations. Net earnings per share were $0.53 compared to $0.83 last year, a decrease of 36.1%. For the first 9 months, net earnings attributable to shareholders reached $82.9 million, down 31.1%. Diluted net earnings per share stood at $1.47 compared to $2.19 last year. Cash flows from operating activities before net change in noncash working capital balances was $48.5 million compared to $60.9 million last year. Net change in noncash working capital items represented a cash flow inflow of $55.1 million. Excess inventories continue to reduce as planned with a positive effect of $24.5 million. As a result, operating activities represented a cash inflow of $103.5 million in the quarter compared to a cash outflow of $2.7 million in 2022. For the first 9 months, cash flows from operating activities represented a cash inflow of $192 million compared to cash outflow of $37.9 million last year. For the third quarter, financing activities used cash flow of $16.9 million compared to $17.2 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. For the first 9 months, financing activities used cash flow of $52 million compared to $46.9 million in 2022. Dividends paid to shareholders amounted to $25.1 million compared to $21.8 million last year. During the first 9 months, we invested $42.5 million, $20 million for 6 business acquisition and $22.5 million, mainly for distribution center modernization and expansion projects, investments in equipment to maintain and improve operational efficiency as well as for IT infrastructure development. We continue to benefit from a healthy and solid financial position with a working capital of $606.1 million for a current ratio of 3.4:1 and an average return on equity of 15.5%. I now turn it over to Richard.

Thank you, Antoine. The integration of recent acquisitions is in progress as are the expansions and consolidation projects underway in our network. We have finalized the consolidation of our centers in the Atlanta and Nashville regions, and our Seattle center is now fully operational. We are also progressing with the Pompano center expansion and plan to complete the consolidation of our centers in the Calgary area in the first quarter of 2024. We expect to end the year on November 30, 2023, with a sustained performance and a solid position by relying on successful strategy that have always served us well, namely ongoing innovation, value-added service, market penetration and business acquisitions, which are our key growth driver. Thanks, everyone. We'll now be happy to answer your questions.

[Operator Instructions] Your first question comes from [ Ariana Millham ] with CIBC Capital Markets.

Richard, can you speak to what kind of organic decline you saw in September and when you expect return to positive organic growth?

What we see so far this year, I think, is very encouraging. If you remember well from the 2019 to the end of 2022, our sales have increased by 70%. The current performance is a clear demonstration though that we keep up with those market shares that we gained during the pandemic, and we're very happy about this. And we consider our performance very satisfactory in the circumstances for the current market.

That's helpful. And Richard, can you speak to the M&A pipeline and whether you've seen any moderation in vendor expectations?

Yes. The pipeline is quite healthy in the U.S. and in Canada as well. So we're working on some opportunities as we speak. But the M&A environment is still very positive for us.

Okay. And then just with respect to your excess inventories, when do you expect to work through them? And what are the risks of further price deflation as you look to normalize inventories?

Antoine will answer for the deflation. Regarding the deflation, there's going to be some deflation for certain products, mainly for those that come from Asia. But as a percentage, though, our gross margin should be maintained after we have -- we are past that -- we were through the excess of inventory. So basically, we look forward to make sure that we stabilize the situation with new inventory at the new costs. And then we're going to see growth for the margins and everything else coming in the future. On the short term, we have to live with that situation. But I think at the end of the first half of 2024, we should be through everything. Antoine?

Yes. And regarding inventory, we were down $65 million since the beginning of the year so far. We've mentioned that we were expecting $60 million to $80 million in 2023, it's going to be closer to [ $80 ] million. And we should probably see another $20 million somewhere in the first half of next year. So -- the inventory should come to a more reasonable level in the middle of next year.

Okay. Great. And just the last question I had was, Antoine, are you able to provide us with some perspective on what EBITDA margins you're targeting for 2024?