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

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware First Quarter 2025 Results Conference Call. [Operator Instructions] Also note that this call is being recorded on April 10, 2025. [Foreign Language]

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu Conference Call for the first quarter ended February 28, 2025. With me is Antoine Auclair, CFO and COO. 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. Richelieu made a strong start in 2025. While the first quarter is generally the weakest period of the year and market conditions remain relatively stagnant, our total sales climbed by 8.6%, driven equally by internal growth and acquisitions. This increase reflects the good performance of the manufacturers market, where sales were up 10%, thanks to our strategy of innovation, acquisition, market penetration and value-added service. In the retailers and renovation superstores market, overall sales were stable compared with the first quarter of 2024. In order to maintain our strategic advantage as market leader, we are investing substantially in this market to update our programs and product lines in retailer stores as well as introducing new products. We see these initiatives are already starting to bear fruit with sales growth in Canada. We are also very pleased with our 5 acquisitions completed, including 4 in the first quarter and 1 following the end of the quarter. On December 1, we acquired Mill Supply, operating in Dartmouth, Nova Scotia and Charlottetown, Prince Edward Island. This acquisition, which was targeted since a long time, expands our presence in the Halifax region, where we already operate 2 centers. In January, we acquired Darant Distributing, a specialized hardware and decorative surface distributor in Denver, Colorado, marking our entry in this strategic market for Richelieu. Then we closed the acquisition of Midwest Specialty Products, a distributor of decorative surfaces, including quartz, which reinforces our presence in the Minneapolis area, where we already are established. In February, we acquired Modulex Partition located in Hillside, New Jersey. This distributor of division 10 products for the construction market enables us to expand our presence in the greater New York area. Our most recent acquisition completed on April 1 is Rhoads & O'Hara Architectural Products, a distributor of exclusive architectural panels and related products, working closely with architects and designers and high-end commercial woodworkers with one distribution center in Vineland, New Jersey. These strategic acquisitions highlight our commitment to expand our reach and increase our product offering across North America. In addition to contributing $50 million in sales, these 5 acquisitions strengthen our position in certain markets, open up new ones, add new products to our range and add also talented team and create opportunities for new synergies. Together, with the 4 acquisitions completed in 2024, they add approximately $120 million in yearly sales. The last 2 years have been years of major investment in our network. Just to name a few in the U.S., we increased our footprint in Detroit, Atlanta, Fort Myers, Chicago, Pompano, Nashville and Seattle region. We also started 2 greenfield locations in Minneapolis and Carlstadt, New Jersey. In Canada, we completed last year the opening of our brand-new 250,000 square feet building in Calgary, while consolidating 2 centers, giving us the opportunity to be a one-stop shop for all Western retail customers. We also undertook the same projects out of Kitchener, Ontario for Eastern retail customers. Early this year, we concluded the consolidation of 2 centers into 140,000 square feet building in Vancouver, serving the [ pro ] market. We are pleased with the investments that were required to continue to gain market shares and to offer a first-class service to our customers. Antoine will now review the financial highlights of the first quarter.

Thanks, Richard. First quarter sales reached $442 million, up 8.6%, driven equally by internal growth and acquisitions. Sales to manufacturers stood at $385 million, up 9.9%, including 5.1% from internal growth. In the hardware retailers and renovation superstores market, sales remained stable at $56.6 million. In Canada, sales amounted to $242 million, up 4.1%. Our sales to manufacturers reached $195 million, and hardware retailers and renovation superstore market sales stood at $46.3 million, up 5%. In the U.S., sales grew to USD 140 million, up 7.6%, reflecting a 10% increase in the manufacturers market, mostly resulting from acquisition, while sales to retailers and renovation superstores market were down. In Canadian dollar, sales in the U.S. reached CAD 200 million, an increase of 14.5%, representing 45% of total sales. First quarter EBITDA reached $42.4 million, up $2 million or 5% over 2024. The lower margin from our recent acquisition, the increased marketing costs for new product lines at our retail customers affected the EBITDA margin slightly downward to 9.6% compared to 9.9% last year. First quarter net earnings attributable to shareholders totaled $13.9 million, a decrease of 8.6% from the first quarter of 2024, mainly due to an increase in amortization expense resulting from the CapEx investment and lease asset additions from the expansion projects and business acquisition made during the previous fiscal year and the first quarter of 2025. Consequently, diluted net earnings per share was $0.25 compared with $0.27 last year. First quarter cash flow from operating activities before net change in noncash working capital balances was $37 million or $0.67 per diluted shares. The net change in noncash working capital used cash flow of $34 million. As a result, operating activities provided a cash inflow of $3.7 million compared to a cash inflow of $0.5 million in the first quarter of 2024. We paid dividend of $8.5 million to shareholders, and we invested $25 million, including $20 million for 4 business acquisitions and $5 million in CapEx. At the end of the quarter, financial situation was healthy and solid with working capital of $613.2 million and almost no debt. I now turn it over to Richard.

Thank you, Antoine. In conclusion, we will integrate our recent acquisition and continue to monitor the market for new opportunities in line with our short- and long-term growth objectives. We currently operate in an ever-changing and volatile market. We remain agile, adaptable and connected to our market in order to continue to offer first-class service to our customers. The tariff measures implemented by the U.S. administration might have an impact on the global economy, and we are on the lookout to take the necessary action to mitigate the effect on Richelieu. Our highly diversified and innovative product offering make us an essential destination for customers. We will continue to build on our core strength, our business model and our innovation and acquisition strategies, our comprehensive market coverage and the strength of our network and our team, the penetration and effectiveness of our transactional website, richelieu.com as well as the distinctive added value of our service and our solid balance sheet. Thanks, everyone. We'll now be happy to answer your questions.

[Operator Instructions] And your first question will be from Zachary Evershed at National Bank.

Could you give us a little bit of color on what you saw throughout the quarter in terms of pricing versus volume to get to where you were for the full quarter?

Basically, the pricing because of the exchange rate, I think we have affected our sales by something like -- I think it's less than 2%...

Yes.

So it's minor. Basically, the growth is number of products sold.

Got you. And then I was hoping you could dive down into the investment in retail channels. How much of a drag was that on margins? And what do you hope to get in terms of return on that?

We're implementing -- we're adding new product lines in the stores for a few major customers in Canada. So in terms of drag on the EBITDA, it's around $0.5 million of drag and it will -- these are onetime fees. So this will disappear and we will benefit from the additional sales in the future.

Yes. Just to complement on Antoine's answer, we have added the stair components in the Home Depot stores. We're in the process of installing the new fence, new safety fence for the pools, which is something which become -- that's going to be part of the regulation of the Canadian market and U.S. eventually, the safety of the children around the pool is mostly important. So we're investing in order to [ display ] those products at Home Depot as we speak. We have a major investment with RONA, 100% of the RONA stores, the big box, the big ones had to be revamped in terms of refreshing our displays, refreshing our product line and adding products. We see that the product for organization is more and more important. We add a ton of those products in the stores across Canada at home hardware and other stores as well. So basically, it's major, but we already -- when we make the changes in the store, we see sales increases something like 15% to 20%. So basically, that was due to be done. It was not done before because we are not allowed at RONA, for example, to make any change because of the situation with Lowe's that was selling RONA. So now that RONA is a new executive group. So basically, these guys are very open to business and Richelieu is allowed to make the necessary changes in order to improve the sales. And for the other stores other than RONA that has been slow because the market was slow for all the retailers and they were quite hesitant before making any changes. I think this is behind us now. So we do what we have to do in the stores, and we're going to reap the benefit.

Very clear. Given what you're seeing in the market, how is the pace of your M&A campaign going? Do you think you'll see an acceleration with people looking to exit a more volatile market? Or are people shutting down discussions?

No, no, definitely not shutting down discussion. But we could see a more favorable market for acquisition in the future because we've seen that in the past, like in 2009 and '10, we've seen increase in good opportunities coming in. But even without that, we -- the channel is very healthy. So we've already closed 5 this year, and we're not done yet. So we have other opportunities we're working on. So it's very healthy either in Canada and the U.S., Zach.

But we also have to be prudent with some companies that may be -- we don't know with the tariff, all the -- everything is changing every week. So we don't know what's going to happen. So if we have -- we see companies that are for sale, but are really dependent on Chinese products, so we have to be prudent. So sometimes we drag our feet because of that. We wait until we know exactly what's going to happen in the market. But basically, as Antoine said, the market for acquisition is very healthy.

Makes sense. And then while we're touching on tariffs, could you go into more detail on your mitigation strategies? Because obviously, we're seeing some very high tariff calls on China, and you do have some exposure there into the U.S.

Our exposure for the U.S. regarding our sales, the Chinese product represent less than 20% of our sales. And basically, we -- all the products we buy from China, we are also buying some local and some from Europe and other country in the world. And we could also add other alternatives like Turkey and Yugoslavia, for example, easily, we have friendly suppliers out there that could supply more products to us similar to the one we buy from China. The price might be slightly different, but with 125% or whatsoever tariff on Chinese products that could become obvious that we're going to have to slow down selling those products. But even without selling any Chinese products in the U.S., I assure you we do well with the other products because the same thing applies to our competitor as well. But we just hope though, and I think personally that, that things will change very quickly. I don't see that those tariffs at 125% and 150% in certain products that could last forever. I'm sure that China and U.S. will get into an agreement soon. But as we speak, though, it does create a lot of uncertainty. And we don't know what's going to happen. But we're very well prepared because we have the most diversified product lines in North America, much more than our competitors. And we have many alternative [indiscernible], but we have [indiscernible] that come from U.S. that come from Italy, that come from Austria, that come from Germany. So the customer has the choice and the best deal will be the choice of the supplier -- the customer.

And Zach, as we speak, we have a team on-site in China meeting with the suppliers.

Yes. And I'm talking to [indiscernible] every morning for me, every night for him. So regarding what's going on in the discussion, I think there is a lot of uncertainty as well with our Chinese suppliers. They all do all the effort that they can to help Richelieu. But with over 100% of tariff nobody can imagine that it could compensate in lowering their costs. So basically, hopefully, that will change. But anyways -- but the Chinese product will continue to sell very well in Canada, where we don't have any more tariff that we had before. So basically, no change in Canada. But in the U.S., we have to be -- we have to make sure that we're very prudent about what we're going to do in the next weeks.

Understood. And then just mechanically, it's a very long supply chain for orders that you placed ahead of the tariff increases. Will those apply to the shipments when you receive them?

Yes.

Yes. Yes. Yes.

Got you. And then just one last one for me. It's potentially a good market for M&A like 2009, 2010, we could see some upside to your annual target for acquisitions. What's your leverage comfort? How high would you take the balance sheet given the uncertainty out there in macro?

I think for the right acquisition, we have no issue leveraging the balance sheet. So anywhere between 2x or 3x EBITDA, but it needs to be for the right investment, strategic investment for long-term value creation. And when we make an investment, Zach, we make sure that the margin that we're -- the EBITDA that we're acquiring is sustainable. So we'll do it for the right opportunity.

[Operator Instructions] Next question will be from Nikolai Goroupitch at CIBC Capital Markets.

Could you discuss how organic sales fared in March?

We have the same trend in March that we had in the last quarter. So basically, I would say that without the tariff, I think Richelieu would have a good year because we -- I think we have all the people necessary in place in order to sell the products. Our inventory are intact. The high inventory with higher cost has disappeared almost 100% of our inventory. Basically, we have -- we are in a very healthy situation. And the market not being very, very -- not moving very much, but I think Richelieu can continue to grab market share. The investment that we have made, we see all the investments that I have named a few minutes ago, all those investments now they give us some fruits. We see the benefit. We see sales increases, profit increases, maybe not at the level that we're looking for yet, but it's improving. So basically, I would be very positive without the -- if you exclude the tariff of the picture, I would be very positive for the market in 2025.

Okay. I see. And I guess you mentioned the overall market there. What do you see -- what are your expectations this year, like many key players on the R&R side pointing to a flat market? Do you have a similar view?

That's what we are in the market. And you see what Lowe's and Home Depot are also talking about. So yes, flat or low single-digit growth, that's what we see as of today.

And at this time, Richard Lord, we have no other questions registered. Please proceed.

If there's no more questions, thanks again. It's always a pleasure to talk to you. Have a good day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.