Richelieu Hardware Q2 2023 Earnings Call Transcript

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July 6, 2023

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Second Quarter Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session, which will be restricted to analysts only. This call is being recorded on July 6, 2023.

Speaker 1

Thank you. Merci. Good afternoon, ladies and gentlemen, Welcome to Richelieu's conference call for the Q2 ended May 31st and first half of twenty twenty three. With me is Antoine Oclare, 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.

Speaker 1

In the Q2, 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 The Q2 of 2022 shows a decrease in sales and earnings, but it should be remembered that the first half of twenty twenty two was To put things in perspective, if we compare Q2 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, 1 in Oregon, Maverick Hardware in Eugene, The other one in Miloszoto, Westland Distributing in Monticello, 2 compatible specialty award distributor who extend and strengthen our presence That makes 6 acquisitions since the start of 2023, adding some $26,000,000 in annual sales. In addition, we opened a new distribution centers 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.

Speaker 1

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 twenty twenty three. Antoine will now review the financial highlights of the quarter and first half. Then I will conclude and we will take your questions.

Speaker 2

Thank you, Richard. 2nd quarter sales reached $172,400,000 down 3.2%, of which 4.7% from internal decrease and 1.5% from acquisitions. It's important to note that in the Q2 of 2022, Richelieu had achieved exceptional internal growth of 16.1%, including a 22.7% increase in the U. S. In Canada, sales amounted to $279,500,000 down 4.3 percent of which 6.4% from internal decrease, partially offset by a 2.1% positive contribution from acquisitions.

Speaker 2

Our sales to manufacturers reached 229,900,000 Down 3% and for the hardware retailers, sales stood at $49,600,000 down 9.8%. In the U. S, sales grew to $141,900,000 in U. S. Dollar, down 7.9%.

Speaker 2

Sales to manufacturers reached US131.3 million dollars down 7.2 percent, sorry. In the hardware retailers and renovation superstores market, sales reached $10,600,000 In Canadian dollar, Total sales in the U. S. Reached $192,600,000 a decrease of 1.6%. For the first half, sales reached $875,100,000 up 0.3%, of which 1.8% from internal decrease and 2.1% from acquisitions.

Speaker 2

In Canada, sales reached $510,400,000 down $11,200,000 or 2.1 percent, of which 3.9% from internal decrease and 1.8% from acquisitions. Sales to manufacturers reached $415,400,000 down $7,300,000 or 1.7%. Sales to hardware retailers and renovation superstores reached $95,000,000 compared to $98,900,000 down 3.9%. In the U. S, sales amounted to $269,600,000 in U.

Speaker 2

S. Dollar, down 2.4%, of which 4.8 percent from internal decrease and 2.4 percent from acquisitions. They reached C364,700,000 percent, accounting for 42 percent of total sales. Sales to manufacturers totaled 249,000,000 A decrease of $3,200,000 or 1.3 percent, 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.

Speaker 2

2nd quarter EBITDA reached $61,500,000 down $16,300,000 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 $110,600,000 down 16%. As for the EBITDA margin, it stood at 12.6% compared to 15.1% last year. 2nd quarter net earnings attributable to shareholders totaled $30,700,000 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.

Speaker 2

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 $53,100,000 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 non Cash working capital balances was $48,400,000 compared to $60,700,000 last year.

Speaker 2

Net change in non cash working capital items Represented a cash inflow of $23,600,000 Excess inventory started to decline with a positive effect of $49,200,000 As a result, operating activities represented a cash inflow of $72,000,000 in the quarter compared to a cash outflow of $3,000,000 last year. For the first half, cash flows from operating activities represented a cash inflow of $88,400,000 compared to a cash outflow of $40,500,000 last year. For the Q2, financing activities used cash flow of $15,400,000 compared to $21,500,000 last year. Dividends paid to shareholders of the corporation amounted to $8,400,000 compared $7,300,000 in the same period of 2022. First half financing activities used cash flow of $35,100,000 compared to $29,800,000 in 2020 Dividends paid to shareholders amounted to $16,700,000 compared to $14,600,000 last year.

Speaker 2

During the first half, we invested $34,300,000 for 6 business acquisitions and $14,300,000 for the purchase of equipment to maintain and improve operational efficiency as well as for network expansion projects. We continue to benefit A healthy and solid financial position with a working capital of $586,200,000 for a current ratio of 2.9 to 1 and an average return on equity of 18.2%. I now turn it over to Richard.

Speaker 1

Thank you, 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 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 strength and the asset to consolidate our North American leadership and deliver Hello?

Operator

Thank you, ladies and gentlemen. We will now begin the question and answer session. You will hear a 3 tone prompt acknowledging your request and your questions will be pulled in the order they are received. One moment please for your first question. Your first question comes from Amir Patel with CIBC Capital Markets.

Operator

Please go ahead.

Speaker 3

Hi, good afternoon. Richard, are you able to quantify how much the cost of carrying that Inventory weighed on your EBITDA margins in the quarter and when do you expect inventories to normalize?

Speaker 1

I will let Antoine complete the answer, but just to the first lens though, the outside water is in cost is costing as we speak About $3,000,000 per year, that's just for For the quarter, sorry. For the quarter, sorry, yes. And plus the other expenses related The back and forth of the merchandise that we have to carry between the different warehouses.

Speaker 2

And we can add to that also the interest on the bank overdraft. So we're talking about Over $6,000,000 per quarter just for to carry these additional inventories. And answer the second part of your question, I mean, basically, the inventory started to decline. So we're starting to reduce the excess. We gave a we told you guys that the inventory should reduce between $60,000,000 to $80,000,000 this year And we should see another $50,000,000 next year to bring us more to a more reasonable level of inventories.

Speaker 3

Okay. Thanks, 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 Your EBITDA margins to stabilize that?

Speaker 2

Yes. This year, we should be able to close the year at around 13% EBITDA. It all depends, of course, Amir, 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% 14%.

Speaker 3

13%, 14%. Okay. Thanks. 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?

Speaker 1

We have not experienced any price decline as such, but sometime for certain items in inventory, we make temporary promotions. So basically, yes, we It does affect our margin, but we don't have any specific prices decrease as such.

Speaker 3

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?

Speaker 2

It's approximately 75% of the Canadian margins. And it keeps improving.

Speaker 3

Okay. No, that's helpful. And Richard, just given all the What's the goal for lifting that 75% in coming years?

Speaker 1

The goal is to increase our sales in the U. S. We have a good performance Budget 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 space basically to continue our growth in the U.

Speaker 1

S. So we And those new investments so far, Antoine, of course, think what on a yearly basis, something like $8,000,000 to $10,000,000 And let's see, we should see the benefit to cover the cost of this.

Speaker 3

Okay. And then I guess the longer term Richard structurally, can you if today the U. S. So locations are 75% of the EBITDA margins of the Canadian locations. Long term, where Can they get up to the same as the Canadian locations?

Speaker 3

Or is it just a different market and it's going to be structurally to some degree lower?

Speaker 1

Very long term, that should be very close. But for the I would say for the short and the medium term, that should continue to be at 5%, because we keep making acquisitions that make 3% and 4% and 5% EBITDA margin. So basically, we take that 3 years, sometimes 4 years to get those businesses back to the margin, close to the ratio margin. But basically, we're very optimistic that Margin will continue to improve and we will not stop making acquisitions because it does temporarily affect our EBITDA margin.

Speaker 3

Fair enough. That's all I have for now. I'll get back in the queue. Thanks.

Speaker 1

Thanks,

Operator

Your next question comes from Zachary Evershed with National Bank

Speaker 4

Good afternoon, everyone. Thanks for taking my questions.

Speaker 1

Good afternoon.

Speaker 4

Do the Canadian acquisitions perform better than U. S. Ones?

Speaker 1

No, not exactly. No, We have basically the same situation when we make an acquisition in Canada. We have exceptional circumstances. We bought, for example, TransWorld Distributing in Halifax. The performance is very similar to Richelieu.

Speaker 1

But other acquisitions that we're making, like maybe Cook Fastener, for example, had a Lower EBITDA margin, but now that we have made some changes from just to give you an example with Cook Fasteners, in In the last three months, we see sales increases by 50%. So basically, that was a good acquisition and the EBITDA margin should be probably at the same level that the ratio is In 2024, in the U. S, it's basically the same situation, but could be a little bit more slow in the U. S. Because we have to make more changes.

Speaker 1

Sometimes it's a cultural change and introducing new products and that type of thing, but it's moving forward.

Speaker 4

That's good color. Thank you. And then my usual question on the M and A pipeline, how is it looking? And anything bigger than usual

Speaker 2

Well, pretty much the same thing, Zach, as you've seen historically in the pipeline. In Canada and in the U. S, it's still very healthy. So we've completed 6 so far and we're working on other ones as we speak.

Speaker 4

Sounds good. Thanks. And how's the pace of sales trending thus far in Q3?

Speaker 1

Yes. In the month of June, we have to remember that Last year in 2022, we had sales increased first of all, I think the month of June of 2022 was our best month ever, if I remember well. And the sales increase compared to 2021 was 16%. As we speak today, we see a decrease in 10% of on overall sales, Which is not bad compared to the performance that we had last year.

Speaker 4

Got you. And you mentioned that you're not seeing any real pricing declines beyond temporary promotions. Are your competitors remaining rational in terms of pricing as they're working through excess inventory?

Speaker 1

Yes. I think they have the same situation That we have. So basically, they try to do their best in order to decrease their inventory and maximize their margin as well. I think everybody is prudent. But we don't see any pressure we don't see any systematic pressure in order to decrease, for example, the pricing for an entire product line, Except temporary situation and temporary promotions.

Speaker 4

That makes sense. Also on your competitors, are you seeing any pinch from higher interest rates on their part, maybe PE backed players slowing down on acquisitions?

Speaker 2

No. No major change there.

Speaker 4

So I do know that it's very lumpy, but could you provide any color on what's happening in the retailers market?

Speaker 1

Yes. The retailers market, as you know, if you look at the Home Depot and North France in the U. S, their sales are down. I think they have a decrease of something like 5%, which is Not that bad, but they're used to more growth than this. And what we see in Canada is that they still have excess inventory And they have overpriced inventory as well.

Speaker 1

So I think the and we have I think the pace is very slow in Canada. We see that the retailers just we see now in the current month that they are starting to buy again because they were rationalizing their inventory. We're not making any changes. But the favorable situation that we see with the retailers, for example, we have let's just give you an example in Canada, At least one competitor that disappeared because they have been sold, the service wasn't good enough and the customer are switching all the products there to issue And we're gaining in the fastener business as well. But those gains are slow because it's month to month.

Speaker 1

We gain so much customer per month. But that should bring good results in 2022 though. So in Canada, we really we gained market share. In the U. S, we also are gaining some new customers with new product as well, but all of these things, it takes forever to make changes in the stores of our customers.

Speaker 1

We expect that to have a favorable impact though in 2024, both in Canada and the U. S.

Speaker 4

That's great information. Thank you. One last one for me. You have the new investments coming online costing about $8,000,000 to $10,000,000 You have about $6,000,000 a quarter in costs related to the additional inventories that's going to come off as you gradually work through Your excess inventory, is there in terms of timing, is there further downside from where we were in Q2, that 13% level Due to a mismatch in additional costs coming in versus costs coming out? Or should we see it tick up from here for the rest of the year?

Speaker 2

No, you should see you will you should not see a reduction in EBITDA margin. So we're working through the external warehousing. So it should you should see some improvement on the margin, Slow improvement because it takes time to resolve to clean up the house with The external warehousing, but you should see improvement unless the volume goes down. So it's distribution. You know how it works.

Speaker 2

So if volume reduces, The EBITDA reduces, but no surprise on the cost side.

Speaker 4

Perfect. Thank you very much. I'll turn it over.

Speaker 1

Thank you, Zach.

Operator

There are no further questions at this time. Please proceed.

Speaker 1

Thank you very much. Have a nice day.

Operator

Ladies and gentlemen, this concludes your conference call for We thank you for participating and ask that you please disconnect your line.

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Earnings Conference Call
Richelieu Hardware Q2 2023
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