Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware first 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. And if at any time during this call you require needed assistance, please press star zero for the operator. Also note that the call is being recorded on April 7, 2022. Bonjour, mesdames et messieurs, et bienvenue. au résultat du premier trimestre de quincaillerie richelieu. Présentement, vos lignes sont en mode d'écoute seulement. Suite à la présentation, nous allons procéder à une période de questions et réponses qui sera restreinte aux analystes seulement. Si vous avez besoin d'assistance au cours de l'appel, appuyez sur l'étoile et le zéro. Veuillez prendre note que cet appel est enregistré le 7 avril 2022. J'aimerais maintenant céder la parole à M. Richard Lord, président et chef de la direction. La parole est à vous, monsieur.

Merci, thank you. Good afternoon, ladies and gentlemen, and welcome to RicherU's conference call for the first quarter ended February 28, 2022. With me is our CFO. RicherU started 2022 on a very positive track, as shown by the organic growth and expansion through acquisitions in the first quarter. The financial performance of the quarter is all the more significant since the first three months of the year are historically our weakest. Driven by our strong network of interconnected centers, our innovation and value added service strategies, the input of our acquisition and our market penetration initiatives, we have seen the opportunities of our diversified market. Our results are quite satisfactory with an increase of 29.2% in sales from solid internal growth and a substantial contribution from acquisition. an increase of 40.8% in EBITDA and 43.2% in net earnings per share. I would like to point out that our sales in the U.S. now represent 40% of our total sales. We ended that first period with a sound financial position and an average return on equity of 24%. As for the expansion achieved in the quadrant, following the five acquisitions completed in Canada and the U.S. in fiscal 2021. On December 31st, we completed three additional acquisitions in the U.S. As previously announced, I would recall that the three acquisitions of CompuDistributors in Illinois and Missouri, HGH Hardware Supply in Alabama, Tennessee, and Georgia, and National Builders Hardware in Oregon, and a combined $100 million in sales on an annual basis. With the five previously completed in 2021, $180 million in yearly sales are added, along with access to new deliveries, new customers, and things that now their respective market very well. I will now turn it over to Antoine for a review of the results and the financial situation for the quarter.

Thanks, Richard. First quarter sales reached 384.5 million, up by 29.2%, of which 16.3% from internal growth and 12.9% from acquisitions. Sales to manufacturers threw it at 326.7 million, up by 35.2%, of which 21.8% from internal growth and 13.4% from acquisitions. In hardware retailers and renovation superstores market, We achieved sales of 57.8 million, up 1.9 million, or 3.4%, due to acquisition and despite a 7.6% internal decrease over sales in the first quarter 2021, which were up 34.5%. In Canada, sales amounted to 230.5 million, up by 19.3%, of which 13.2% from internal growth and 6.1% from acquisitions. Our sales to manufacturers reached $186.7 million, up by 21.9%, of which 17.7% from internal growth and 4.2% from acquisitions. As for the hardware retailers and renovation superstores market, sales stood at $43.8 million, up 9.5%, of which 13.8% from acquisition and 4.3% of internal decrease. In the U.S., sales grew to 121.2 million U.S. dollars, up 48%, 22.5% from internal growth, and 25.5% from acquisitions. They reached 154 million in Canadian dollars, an increase of 48%, and represented 40% of total sales. Sales to manufacturers reached 110 million in U.S. dollars, up by 58.8%, 29.3% from internal growth, and 29.5% from acquisition. In the hardware retailers and renovation superstores market, sales were down 12% from the corresponding quarter of 2021, which were up 32%. First quarter EBITDA reached 53.7 million, up 15.6 million, or 40.8% over the first quarter of 2021. The gross margin was slightly better, and the EBITDA margin improved to 14% compared to 12.8% last year due to the increase in sales and continued control of expenses. First quarter net earnings attributable to shareholders totaled $30.1 million, up 43.4%. Diluted net earnings per share rose to 53 cents compared with 37 cents last year, an increase of 43.2%. First quarter cash flow from operating activities before net change in working capital balances amounted to 42.6 million or 75 cents per share, an increase of 38.5%. Net change in non-cash working capital balances used cash flow of 80 million mainly due to investment in inventory as a result of the increased demand and to a lesser extent to the higher cost of some products. We paid dividends of 7.3 million to shareholders and we invested $46.2 million, including $42.4 million for three business acquisitions and $3.8 million in CapEx. I now turn it over to Richard.

Thank you, Antoine. In the coming quarters, we will pursue the integration of our eight recent acquisitions. To better serve our market and respond to demand, we will continue to expand our U.S. network in addition to the 2021 expansion in Detroit, Reading, Boston, Orlando, Dallas, and Rochester regions. We will finalize the extension of our Fort Myers, Atlanta, and Chicago centers. We are keeping our focus on our value-added, multi-access service and our main road driver, which are our innovation and acquisition strategies and market penetration in Canada and the U.S. Richelieu will always remain customer innovation and result-oriented. Thanks, everyone. We'll now be happy to answer your questions.

Thank you, Mr. Long. Ladies and gentlemen, if you would like to ask a question which is restricted to analysts today, you will need to please slowly press star followed by 1 on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to remove yourself from the question queue, please press star followed by 2. And if you're using a speakerphone, you will need to lift a handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. And your first question will be from Megan Annette at TD. Please go ahead.

Thank you. Good afternoon. First question on the EBITDA margin in the quarter. understanding that Q1 is a seasonally weaker period. Is there anything to note that pressured the margin in the quarter? And would you expect to remain above the 13.5% to 14% level in the near term?

Yeah, it's Antoine speaking. The answer to your question is yes, we expect it to remain over the thresholds you just mentioned. And there's nothing specific. It's really important to understand that if it's a margin – in Q1 is directly the lowest one. So the Q1 is a softer period compared to the next period. So historically, it's always been the case.

In terms of what you're hearing from your customers, on the residential side, are customers noting any weakness in light of the current macro environment? Are you seeing any change in their tone given the rising interest rate environment and perhaps inflationary headwinds? And if you could also just talk to your exposure in institutional markets and any trends you're seeing from customers servicing those at markets as well.

For all the markets that we're servicing, whatever it is, residential, commercial, it seems that our customers are still quite busy. While consulting our salespeople, they keep saying to us that our customers are probably busy until the end of the year at least. We never know about 2023. It's too early. But we have, we're learning though that the shipping period, you know, has been shortened. The shipping cabinet, you know, three months ago would take eight months. Now the delay would be five to, four to five months. It's improving, but also there are many projects that have been postponed as well that will be coming back to the market. Regarding the commercial, those things remain very strong because of the infrastructure for the government, whatever it is, schools, you know, whatever. The governments and institutions have a huge budget actually for infrastructure which generates some pretty good business, and we're also extending in various markets like the closet in which our sales increased something like 40% so far still this year. And the RV market, you know, that's a new market for us. We have the good surprise to see that our sales growth in this market are very, very interesting and will continue to grow in the future. We even have added a new sales force just to cover the RV market in the U.S. because this is a huge market and this is a market that is presently very, very busy. We expect the trend to continue on for the rest of the year, but we never know about 2023, but we're optimistic because many projects have been postponed. I think the COVID is not 100% finished, so people will be traveling probably less and go less to the restaurant as well, so they will probably undertake other projects like the closet, the kitchen cabinets, the bathroom, while the commercial will remain to be strong in the future as well. That's about what I could say, what I could comment about the situation.

Great. And then the last question for you, Richard. You have mentioned previously that annual sales of $2 billion would be achievable for the business. Can you put some context around that commentary, including when you see that being achieved and also the drivers behind it in terms of organic growth and acquisitions? Thank you.

We already have reached $1.4 billion. It's easy to to forecast the growth of this year and to see where we're going to be at the end of 2022. And let's say that 2023 is also a decent year with a growth, let's say, like 10%, including everything else. That's going to be very close to $2 billion. And in the U.S., actually, I think our team in the U.S. is on fire because the target, you know, it's a target among us, between us here, is to reach $1 billion only in the U.S. That's optimistic for the short term, but We have reached an important, you know, stepping stone this month, this quarter, because we have reached 40% of our sales now, 40% of our total sales are in the U.S. And the goal has always been to be at least at 50% so we're getting close. Last year we were something like at 35 at once, if I remember well. So if we can keep up with that 40%, that's very encouraging. And I can tell you one thing. Our team in the U.S. is on fire.

Thank you. That's all for me. Thank you. Next question will be from Premier Patel at CIBC Capital Markets. Please go ahead.

Hi. Good afternoon. Richard, could you give us a sense as to how your sales in the month of March fared for both manufacturers and retailers?

We're in the same trend that we were in the first quarter so far. and it seems to be continuing on like that, and we'd like to continue at least for the present quarter.

Great. Thanks. That's helpful. Richard, you pointed out a pretty positive picture across your various end markets. I'm sure you've seen some of the reports of disappointing R&R demand, at least for wood products. I was curious, do you think Perhaps it's more a story of weakness in the DIY category where you have less exposure, or is it potentially a sign of weakness ahead for your own business, just given that, you know, maybe the wood products are installed earlier in a reno process than your categories are?

Looking at the price of the wood, if you look at the residential market, I was speaking with contractors last month, and they were seeing me that the You know, the building material, including wood, the wood is about 20% of a house, while the building materials in general are 50%, including the wood, and the labor is 50%. So basically, you know, the cost for house and the renovation is still not that bad. I think the retailers market, I think the market is just back to where it should have been, like it was before the pandemic. So far, this is what we see. And we, if you remember last year, we had two strong first quarter and two weak last quarter. So I guess you're going to be, it's going to be difficult to reach the level of last year for the present quarter, I mean the second quarter. And for the two last quarter, we should do better than last year because we see, we look at the sales, sales are normal actually. We have, as a matter of fact, it does include some inflation but We have an increase and we will have a slight increase in the second quarter, including, you know, the acquisitions. And in the second quarter, that should be much better. I don't know if I answered well your question, but this is what I understood.

Okay. No, that's helpful. And just the last question for me, you know, Richard, just given the growing concerns, especially in the U.S., about rising mortgage rates and what that could mean for housing, Are you seeing signs of some of the acquisition targets that you've, you know, had discussions with maybe being more inclined to want to transact this year?

What we have seen actually, I think we've made three wonderful acquisitions in December 31st, 2021. And I think these guys, they have sold their business because they thought probably that they were at the top of what they can reach in terms of results. If the market, you know, is cooled down a little bit, are there some other distributor that will decide to sell? Probably yes. We don't know yet. But for the time being, our pipeline is still interesting, but we need more beef in terms of those acquisitions like the one that we've made last year. And that should come in the course of the year. But we are on the lookout, 100%. We have a team that is dedicated 100% for the acquisitions I hope that we're going to have a good year for that as well.

Okay, great. Thanks. That's all I had.

I'll turn it over. Thank you. Once again, if you are not going to listen and would like to ask a question, please press star followed by one. And your next question will be from Zachary Evershed at National Bank.

Afternoon, guys. Thanks for taking my questions. Given the inflation that we're seeing ahead, can you give us an idea of the cadence of 2022 price hikes that you're planning?

Yeah, if you look at the first quarter, we're talking somewhere around 12%. And as you know, Zach, we are a very flexible pricing system. If we see increases in product costs, we're going to be adjusting prices. So that's what we've always been doing.

But at this point in time, not really any further price hikes in the pipeline?

As we speak, nothing in the pipeline. But if we need to, we'll do it.

Understood. And then on the sourcing front, can you give us an idea of whether you're seeing any improvements in either freight costs or just in general unlocking and logistics?

We don't see any improvement in the freight costs. I think we see that getting worse and worse and worse. But fortunately, though, I guess you have seen that we have increased our inventory. You know, I think Antoine, you know, has not lost control, but his inventory has increased something like what from last year, Antoine? A lot. A lot. 60 million, 75 million? Yeah. But I think it's very positive. I think it's a very positive risk because we expect the, you know, the procurement to be more difficult in the couple of months to come because of whatever delays in freight, transportation, and various problems with some local Asian suppliers, not because it's our suppliers, because it's problems typical to Asia as we speak now. So I think it's good to have a little bit more inventory at this time of the period and I think that should continue to more sales and that should contribute as a big advantage compared to some of our competitors mainly in the US.

That's helpful. Thanks. And one last one. On national builders, how big is the machinery business there? And in terms of a margin profile, how does it compare to the rest of the business? And do you see any further growth in this area?

Well, it's non-material, Zach. Okay. Thank you very much. I'll turn it over.

Thank you. And at this time, Mr. Long, we have no further questions. Please proceed.

Thanks, everyone. It's always a pleasure to talk to you. We look forward to meet you in person, hopefully as soon as possible in the course of 2022. Bye-bye and have a good rest of the afternoon.

Thank you. 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 line. Mesdames et messieurs, ceci termine votre appel aujourd'hui. Veuillez s'il vous plaît débrancher votre ligne.