Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware second quarter 2022 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, which will be restricted to analysts only. 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 July 7, 2022. Bonjour, Mesdames et Messieurs. Et bienvenue au résultat du deuxième trimestre de quincaillerie Richelieu. Présentement, vos lignes sont en mode 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 étoile et zéro. Veuillez prendre note que cet appel est enregistré le 7 juillet 2022. J'aimerais maintenant céder la parole à M. Richard Lord, président et chef de la direction. La parole est à vous, monsieur.

Thank you. Good afternoon, ladies and gentlemen, and welcome to this for the second quarter and first six months ended May 31st, 2022. With me is Antoine Auclair, CFO. As usual, though that some of today's issues include forward-looking information, which is provided with the usual disclaimer, as reported in our financial findings. We achieved strong growth in the second quarter, as reflected in our results. with a 31.4% increase in total sales, including a record 55% increase in the U.S. sales, a 25.8% increase in net earnings per share, and a sound financial position with a 24.4% return on average equity. We are benefiting from our recent acquisitions and the investment that we have made in recent years in new market segments and strategic areas, both in Canada and in the U.S. Our dynamic and sustained market development and penetration efforts continue to pay off, and each market segment made a solid contribution to the quarter's growth. In Canada, we achieved a 17.2% increase in sales, and as I mentioned earlier, we realized a record 55% increase in the U.S. market. Overall, increases in the manufacturers' and the retailers' markets were 34.6% and 15.2% respectively. The expansion of our customer base and network, the diversification of our market segment, coupled with our ongoing innovation strategy and our value added multi-access service are the key drivers of our growth. I will now hand it over to Antoine for a review of the results and financial situation of the quarter.

Thanks, Richard. Second quarter sales reached $487.9 million, up 31.4%, of which 16.1% from internal growth and 15.3% from acquisitions. At comparable exchange rates last year, sales increase would have been 30.1%. In Canada, sales amounted to $292.3 million, up 17.8%, of which 11.3% from internal growth and 6.5% from acquisitions. Our sales to manufacturers reached $237.3 million, up 17.3%, of which 19.9% from internal growth and 4.4% from acquisition. As for the hardware retailers, sales stood at $55 million, up 20.4%, of which 4.3% from internal growth and 16.1% from acquisition. In the U.S., Sales grew to $154 million in U.S. dollars, up 54.8%, 22.7% from internal growth, and 32.1% from acquisitions. Sales to manufacturers reached $142 million in U.S. dollars, up 63%, 26.4% from internal growth, and 36.6% from acquisitions. In the hardware retailers and renovation superstores markets, sales were down 1.6%. In Canadian dollars, total sales in the U.S. reached 195.6 million, an increase of 58.6%, and representing 40.1% of total sales. For the first half, sales reached 872.4 million, up 30.4%, of which 16.2% from internal growth and 14.2% from acquisitions. In Canada, sales reached 521.6 million, up 80.3 million, or 18.2% of which 11.9% from internal growth and 6.2% from acquisition. Sales to manufacturers reached 422.8 million, up 67.3 million, or 18.9%. Sales to hardware retailers and renovation superstores reached 98.8 million, compared to 85.8 million, up 15.2%. In the U.S., sales amounted to $276.1 million in U.S. dollar, up 52.3%, of which 23.1% from internal growth and 29.2% from acquisitions. They reached $350.8 million in Canadian dollar, up 54.1%, accounting for 40.2% of total sales. Sales to manufacturers totaled $252.6 million, an increase of 96.5 million, or 61.8%, of which 28.3% from internal growth and 33.5% from acquisition. Sales to hardware retailers and renovation super stores were down 6.7% compared to last year. Second quarter EBITDA reached 77.9 million, up 16.9 million, or 27.7% over last year, resulting from increased sales and continued control of expenses. Gross margin declined slightly, and the EBITDA margin stood at 16% compared to 16.4% last year. First half EBITDA reached $131.6 million, up 32.8%. As for the EBITDA margin, it stood at 15.1% compared to 14.8% last year. Second quarter net earnings attributable to shareholders totaled $47 million, up 25.5%. Net earnings per share were $0.84 basic and $0.83 diluted compared to $0.67 basic and $0.66 diluted last year, an increase of 25.4% and 25.8% respectively. First half net earnings attributable to shareholders reached $77.1 million, up 32%. Diluted net earnings per share stood at $1.37 compared to $1.03, up 33%. Second quarter cash flow from operating activities before net change in working capital amounted to $60.7 million, or $1.07 per share, an increase of 28.5%, resulting primarily from the net earnings growth. Net change in non-cash working capital used cash flow of $63.7 million, mainly reflecting increases in inventories of $44.1 million, resulting from higher demand and cost of supply increases. Change in account receivables and other items used cash flow of $19.6 million. Consequently, operating activities used cash flow of $3 million. For the first half, cash flow from operating activities before net change in working capital were up 32.4%, totaling $103 million or $1.83 per share. Net earnings and net change in non-cash working capital balances use cash flow of $143.8 million, primarily representing changes in inventories that use cash flow of $117.3 million, and accounts receivable and other items use cash flow of $26.5 million. Consequently, operating activities use cash flows of $40.5 million compared to a cash flow of $55.9 million last year. For the second quarter, financing activities used cash flow of $21.5 million compared to $7.4 million last year. Dividends paid to shareholders of the corporation amounted to $7.3 million compared to $3.9 million in the same period of 2021. We also repurchased common share for an amount of $7.9 million. For staff, financing activities used cash flows of $29.8 million compared to $23.9 in 2021. Dividends paid to shareholders amounted to $14.6 million compared to $11.6 million last year. During the first half, we invested $52.4 million for the three business acquisitions made in the first quarter and $10 million for the purchase of equipment to maintain and improve operational efficiency as well as further IT investments. We continue to benefit from a healthy and solid financial position with a working capital of $481.5 million for a current ratio of 2.8 to 1 and an average return on equity of 24.4%.

I now turn it over to Richard. Also, we'd like to reinforce the fact that our sales are now above 40% in the U.S. market. So Richard presents an important milestone for us as we are getting closer and closer to the 50% mark. We continue to expand our U.S. network to capture market demand. As previously announced, we completed last year the expansion of our Detroit, Orlando, Boston, and Dallas locations while opening two centers in Rochester and Reading. In addition, this year, we started the expansion of our Atlanta, Fort Myers, Chicago, and Pompano locations, which are progressing very well and are on the schedule. The manufacturer's market remains strong, and our customers are still very busy, while the retailer's market has been fueled via the acquisition of OSCAN and TAS2. While questioning the integration of our most recent acquisition, we are still watching the acquisition market closely and hope to seize new opportunities that fit our criteria by the end of the year. We remain focused on innovation, acquisition, and value-added service strategy, as well as on cost control, in order to continue to grow profitably. Thanks, everyone. We'll now be happy to answer your question.

Thank you. Ladies and gentlemen, as stated, we will take questions from analysts. If you would like to ask a question at this time, please press star followed by one on your touch-tone phone. You will 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 two. And if you're using a speakerphone, please lift a hands up before pressing any of the keys. And your first question will be from Hamir Patel at CIDC. Please go ahead.

Hi, good afternoon. Richard, are you able to share with us in terms of the growth in the quarter, how much was driven by price versus volume?

We estimate it's a ton of approximations, but I would think the The price increases, as we speak, affect the sale by something like 10 to 12%. So, basically, we think that the goal that we've seen actually is very healthy.

Fair enough. And, Richard, when you think out, you know, about the year ahead and if we were to enter a recession here, how do you think about the risks of price deflation across your product categories?

I think we're still far from a price deflation. The price would probably, I would say the freight cost might decrease. You know, I would say, it has already decreased, but we fall that the industry, not America, feel the effects of the decrease in freight. That will take a few months, probably that will go until the second quarter of 2023. So that will apply to fishery as well. Regarding the cost of the products, Even though we see changes in the price of the commodities like steel, aluminum, that type of thing, we think that actually the shortage of labor is worldwide, and we don't feel that any supplier would be in a position to decrease their pricing. unless maybe temporarily. So basically, we don't see a decision as being at our doors as of now. That might come in the future, but I would say that, you know, with the decrease of the freight costs and whatever is going to happen in the months to come, you know, we have to turn our inventory at least one time again, and then we're going to get into the new costing strategy. I've been here for 35 years. I've never had to decrease any pricing. So I would say that the world and the suppliers will find a way to keep the price at the level that they are, except for the freight that has to go down. There's no doubt on mine. But the cost of the freight now is what, 3% of our average of the purchasing of our products? So that's not a huge effect on the pricing. Okay, fair enough.

And I wanted to ask about M&A. You know, the company has been quite active in 2020, 2021. We haven't seen any new deals yet this year. Can you comment on, you know, how the pipeline looks? And have you seen any moderation in vendor expectations, just given the deteriorating how they now look in the U.S.?

No, I mean, it's just finding. So we're working on many files. in Canada and the U.S. as well. So it's just the timing of closing these files. So the pipeline is still very healthy.

And also, I mean, we're planning to open new greenfield start in certain area of the U.S. in the months to come as well. Just to mention Minneapolis that we have made decision yet that decision has been made. So basically, I mean, we have other spots where we would like to open you know, distribution centers in the future even though if we don't make acquisitions. So we have to combine, you know, the new establishment, the new location with the acquisition. And that should basically, that should continue to fuel our growth in the future. Okay.

Fair enough. And just a last question for me. I'm not sure if you have this handy, but could you speak to how sales in the month of June fared on both the manufacturer's side and with retailers?

It's very similar versus what you've seen in the quarter.

Okay, great. That's all I had. I'll get back to you. Thanks.

Thank you. Next question will be from Zachary Evershot at National Bank. Please go ahead.

Hi, it's actually Thomas calling in for Zach. Most of our questions have been answered, maybe one. We're trying to drill down on the margin trajectory here. Was there any benefit from low cost inventory on gross margins? And how fast is that fading if there is? And then I'll have another one.

Yeah, we're looking more at the... at the EBITDA level. So EBITDA level, we're around the 16% mark. So what we're seeing towards the end of the year, we're seeing high 14 to 15 to 15%. So the post-COVID, the normalized margins would be around that level. So high 14, 15%. Okay, perfect.

And last one for me. Now that shipments might be coming in faster, Do you think you're going to have to incur additional warehousing costs? And is there any signs of retailers needing to dial back on some orders as they build inventory?

You're absolutely right. Actually, since the shipment suppliers from Russia are faster, you see that we already have an excess of inventory. That should continue on for a month or two maximum. After that, we should see a decrease of the inventory. And okay, I have to complete my answer with the additional warehouse question. You're absolutely right. I would say that actually this year, overall, we're going to pay close to $4 million in additional costs. for warehousing those excess inventory. But on the other side, though, if you remember, we used to pay extra money in order to get our containers faster here in Canada and the U.S. So we expect that will not be the case again in the third and fourth quarter. So basically we're going to save money there and we have to pay the extra warehouses, which is normal in the type of business we are in.

All right. That's very helpful. Thank you very much.

Thank you. Once again, as a reminder, ladies and gentlemen, if you do have any questions at this time, please press star followed by one. And your next question will be from Megan Annette at PD Securities.

Thank you. Good afternoon. Is there anything you can provide? Good afternoon, Richard. Is there anything you can talk about with regards to what your customers are expecting for 2023 at this point? Like how long are backlogs typically and at what point do you start to get some visibility out to 2023?

So as we speak now, our customers are still very busy. You know, just to give you in the last quarter in the U.S., for example, the kitchen manufacturing market in the U.S., kitchen manufacturing customers have bought 25% more for the quarter. And this is continuing on as we speak now. We see the commercial woodworkers, you know, business in the U.S. have been increasing by 35%. You know, that's without acquisition. That was for the last quarter. And we have other specialized markets where the new market that we have invested in in the last few years, and we see a benefit actually, a sales growth of 35% in U.S. again, and something like 20% in Canada. So the market is still strong and healthy. And as we speak, we still see the same growth. And when we speak with our customers, they're still busy at least for the next quarter. I would say four to five months. It's hard to tell you how much we're going to do in 2023, but what we see is that most of our customers are busy still, and those that have some restrictions, some labor restrictions, for example, what I hear from the customers that I spoke to myself, is that they have less employees, but they choose the best opportunity for them. So they're going to choose the best contract, you know, the higher price kitchen cabinet that are usually fully equipped with machinery products. So that does bring some positive benefits as well. So... That's what we see so far, but I'm still very optimistic for 2023 because I think the renovation market is there. It's a must. People need to do some renovation. As far as the recession, if we see that the recession is coming, at Richelieu, we don't see that. I think it's a good thing. That would be, I don't know if I could put it that way, but not a bad thing for Richelieu to see a recession coming. Because usually, Rishabh does very well during the recession. We make more acquisition, and that could fix the labor shortage situation and the inflation for our customers as well as for us. So basically, we see the future as being very, very positive.

And again, the market share in the U.S., there's so much to gain. So even in a recession, we have so many customers we can touch on. So we're very confident about what we're seeing in front of us.

Great. Thank you. And then I just had a question on free cash flow. So you talked a bit about the inventory and some of the dynamics there, but free cash flow for the business was negative for the first half of the year. So do you have any comments as to what we could expect for the second half related to working capital as it relates to inventory? Would you expect that to be a source of cash, or will you continue to reinforce your inventory position?

Yeah, the first half of the third quarter, we should continue to build the inventory, and it should start reversing afterwards.

And then just last question, Antoine, I wanted to follow up on your comments around the EBITDA margin. So are you effectively raising your expectation from 13.5% to 14% up to the high 14% to 15%?

Right. For this year, the high 14s, 15% makes sense. For the, let's see, a post-COVID normalized margin, I would say if we have those kind of, these level of volume, I would say the high 14s could make sense.

Great. Thank you.

Thank you. And at this time, Monsieur Law, we have no other questions registered, sir.

So if there's no more questions, thank you again for attending. We'd be happy to talk to you if you wish to give us a call or visit us. So thank you very much and have a nice 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.