Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen, and welcome to Reshow Your Hardware Third Quarter Results Conference Call. At this time, all participant lines are in the 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 immediate assistance, please press star zero for the operator. Note that the call is being recorded on October 6, 2022. Bonjour, Mesdames et Messieurs, et bienvenue au résultat du troisième trimestre de quincaillerie et richelieu. Présentement, vos lignes sont en boîte 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 étoile 0. Veuillez prendre note que cet appel est enregistré le 6 octobre 2022. J'aimerais maintenant céder la parole à M. Richard Lord,

Good afternoon, ladies and gentlemen, and welcome to this year's conference call for the third quarter and first nine months of fiscal 2022. With me is Antoine Auclair, CFO. As usual, note that some of today's issues include forward-looking information, which is provided with the usual disclaimer, as reported in our financial findings. In line with previous periods, we achieved a strong third quarter with a 26.7% increase in total sales to which our Canadian market segment contributed as well as our U.S. manufacturer market where we realized a sharp rise of 51% in U.S. dollar of which 32% came from acquisitions. an EBITDA increase of 23.8%, with an EBITDA margin of 16.7%, and a net earnings per share increase of 18.8%. This performance helped drive our total sales for the nine months up 29.1% to $1.3 billion, and net earnings per share increased by 27.3% to $2.19. We ended the period with a sound financial position, including a return on average equity of 24.1%. RicherU has always been careful to maintain an accurate ability to react and adapt to market conditions, which contributes to our sound financial track record over the years. Furthermore, we are driven by a combination of key strengths, including the efficiency of our business model, specially designed to meet the needs of our Canadian and U.S. customers and anticipate their expectations through our obsession with service and our resolute focus on innovation. The diversification of our market segment is also a great strength, and we continue to have strong leverage with our acquisition in North America, where 80 have been completed since 1988. In this regard, we recently concluded a fourth acquisition of the financial year in Anjou, Quebec. We also signed three agreements in principle for two acquisitions in Canada and one in the U.S. Together, these four transactions should add approximately $23 million in annual sales. I will now hand over to Antoine for a review of the quarterly results and the financial situation.

Thanks, Richard. Third quarter sales reached $472.9 million, up 26.7%, of which 15.8% from internal growth and 10.9% from acquisitions. At comparable exchange rates to last year, sales increase would have been 24.9%. In Canada, sales amounted to $279.6 million, up 14.8%, mostly from internal growth. Our sales to manufacturers reached $228 million, up 15.7%, of which 14.5% from internal growth and 1.2% from acquisitions. As for the hardware retailers, sales stood at $51.6 million, up 11.2%, entirely from internal growth. In the U.S., sales grew to $150 million in U.S. dollars, up 43.7%, 15.3% from internal growth, and 28.4 from acquisition. Sales to manufacturers reached 141 million in U.S. dollar, up 50.7 percent, 18.7 percent from internal growth, and 32 percent from acquisitions. The hardware retailers and renovation superstores market sales reached 9.1 million. In Canadian dollar, total sales in the U.S. reached 193.3 million, an increase of 48.9% and representing 41% of our total sales. For the first nine months, sales reached 1.3 billion, up 29.1%, of which 16.2 from internal growth and 12.9% from acquisitions. In Canada, sales reached 801 million, up 116.5 million, or 17%, of which 12.8% from internal growth and 4.2% from acquisitions. Sales to manufacturers reached 650.7 million, up 98.2 million, or 17.8%. Sales to hardware retailers and renovation super stores reached 150.5 million, compared to 132.2 million, up 13.8%. In the U.S., sales amounted to $426.1 million in U.S. dollars, up 49.2%, of which 20.3% from internal growth and 28.9% from acquisitions. They reached $544.1 million in Canadian dollars, up 52.2%, accounting for 40.4% of our total sales. Sales to manufacturers totaled $393.6 million, an increase of $143.9 million, or 57.6%, of which 24.8% from internal growth, and 32.8% from acquisitions. Sales to hardware retailers and renovation superstores were down 9.7% compared to last year. Third quarter EBITDA reached 79.2 million, up 15.2 million, or 23.8% over last year, resulting from increased sales. Gross margin declined slightly due to acquisition, and the EBITDA margin stood at 16.7% compared to 17.1% last year. For the first nine months, EBITDA reached $210.8 million, up 29.2%. As for EBITDA margin, it stood at 15.7% compared to 15.6% last year. Third quarter net earnings attributable to shareholders totaled $46.4 million, up 19.6%. Net earnings per share were $0.83 basic and $0.82 diluted compared to $0.69 basic and diluted last year, an increase of 20.3% and 18.8% respectively. For the first nine months, net earnings attributable to shareholders reached $123.4 million, up 27.1%. Diluted net earnings per share stood at $2.19 compared to $1.72, up 27.3%. Third quarter cash flow from operating activities before net change in working capital amounted to $60.9 million or $1.08 per share, an increase of 23.5%, resulting primarily from net earning growth. Net change in non-cash working capital used cash flow of $58.2 million, mainly reflecting increased inventories of $92.6 million, resulting from higher demand, cost of supply increase, and reduced delivery delays from AGI. Change in accounts receivable and other items represented cash inflow of $34.4 million. Consequently, operating activities represented a cash inflow of $2.7 million. For the first nine months, cash flow from operating activities before net change in working capital were up 28.9%, totaling $162 million, or $2.91 per share. Net change in non-cash working capital balances used cash flow of $202 million, primarily representing changes in inventory that use cash flows of $190.9 million and accounts receivable and other items use cash flow of $11.1 million. Consequently, operating activities use cash flow of $37.9 million compared to a cash inflow of $90.3 million last year. For the third quarter, financing activities use cash flow of $17.2 million compared to $18 million last year. Dividend-paged paid to shareholders of the corporation amounted to $7.3 million compared to $3.9 million in the same period of 2021. For the first nine months, financing activities used cash flow of $46.9 million compared to $41.8 million in 2021. Dividends paid to shareholders amounted to $21.8 million compared to $15.5 million last year. During the first nine months, we invested $59.2 million for the two-digit acquisitions made in the first quarter and $16.8 million for the purchase of equipment to maintain and improve operational efficiency, as well as investment in IT infrastructure and network extension projects. We continue to benefit from a healthy and solid financial position with a working capital of $525.7 million for a current ratio of 2.8 to 1 and an average return on equity of 24.1%.

I now turn it over to Richard. Thanks, Adoine. To conclude, in the U.S., in addition to the ongoing expansion of our Fort Myers, Atlanta, and Chicago centers, we have started the expansion of our Pompano and Nashville distribution centers, and we'll open new centers in Cal State, New Jersey, and Minneapolis. Regarding the recent event in Florida and talking about the hurricane, we are happy to report that our location suffered minimal damages and everyone is safe and we are fully operational. We are pursuing the integration of our recent acquisition while remaining on the lookout for opportunities in the acquisition market that fit our short and long-term criteria. We are still working on penetrating strategic market and we continue to adapt as efficiently as possible to market conditions, whatever they will be. We expect to end the financial year with good results. Thank you, everyone. We'll now be happy to answer your questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift the hands up before pressing any keys. Again, a reminder that Q&A is restrained to analysts only. And your first question will be from Amir Patel at CIBC.

Good afternoon. Richard, Antoine, could you comment on the growth rate you've seen in September with manufacturers and retailers?

What we're seeing as we speak is still over a double-digit growth in the U.S., and I would say about a 6% to 7% growth in Canada. That's about for the month of September. And October should be all right as well as November when we have to expect the month of December and January usually our slowest month. As usual, the first three months of the year of the fiscal that we show you is always slower because of vacation, Christmas season, and everything else. But so far, so good.

Okay, no, that's helpful. And, Richard, was that sort of consolidated, or was that just the manufacturer's piece? And maybe if you can comment how the retailer's business is.

I was speaking about manufacturers, but the retailer's growth is about the same that we've seen since the beginning of the year. It's rather low, but it's still positive.

Okay, great. And, Antoine, are you able to break down the 16% organic growth, how much of that was price versus volumes? Yes.

I would say that price would be like 12% to 13% is price. Okay.

And are you seeing any signs of prices starting to moderate as you've moved into Q4?

What do you mean in terms of sales price?

Yes.

Yeah, sales price, it's all behind us. So what you see now is what you're going to get in Q4. If nothing else, change.

Okay. And just the last question I had was just on the EBITDA margin side, you know, very strong quarter, 16.7%. I know on the last call you said you expected them to normalize in the high 14% to 15% range. But the longer you're staying over 16, are you starting to reassess where you see long-term margins?

No, the – My comments will be the same. So as long as we stay around those 15%, 16%, 17% internal growth, we will continue to see strong 16% margin. But in a more normalized environment where we would have a more normalized growth, high 14% to 15% should be the norm.

Okay, great. Thanks. That's all I had. I'll turn it over.

Thank you. Next question will be from Megan Emmett at TD. Please go ahead.

Thank you. Good afternoon. The inventory balance is up substantially year over year. Can you just break down some of the key drivers of that growth? Can you also talk about how you're thinking about inventory planning for the coming year, just in light of the potential for change in consumer purchase patterns and whatnot? It looks like there was also investment in inventory in the quarter. Just want to get a sense of how you're thinking about inventory planning.

Yeah, inventory has increased materially since the beginning of the year, so a $200 million increase. If you want to break that out a bit, so $50 million comes from price increase. So just the price increase of our product explains $50 million of this increase. 30 million is coming from acquisition and other expansion projects. The rest is growth and supply chain disruption. So we definitely are in an excess inventory position as we speak. So the delays in getting the inventory is reducing in Asia. So the material is what we placed nine months ago is coming in. we should be at this level until the end of the year and it will start reversing early 2023.

And in evaluating potential acquisition targets, are you seeing any changes in valuation at this time or any change in the willingness of targets to sell?

No, valuation is pretty much the same as what you've seen in the past four to six times. And if we enter into a more difficult position, this would probably create more opportunities on the acquisition front. But the network, the pipeline is still healthy, and we will try to see otherwise as usual. It's still good.

Okay, and just last question. With regards to some of the damage that might have been incurred in Florida, can you just talk to how your business performs you know, when there are potential opportunities created by unfortunate events such as this.

Well, that will certainly create some opportunities, but we don't expect any turbulence in this market, you know, market in Florida because of that. I think we have quite a big share of the market in Florida. We have nine distribution centers over there, so whatever business that is going to be available in addition to what we already have will be captured by us, but But usually, you know, that kind of storm, you don't destroy, you know, the good houses are not going to be destroyed. And usually, this is where you find the nice kitchen cabinet, the nice closet, nice bathroom as well. So, basically, we don't expect much from that. But we're willing, if there are some opportunities, we'll be there to capture them.

That's all for me. Thank you.

Thank you.

Thank you. Once again, to all analysts, if you would like to ask a question, please press star followed by one on a touchstone phone. And your next question will be from Zachary Evershed at National Bank.

Are contractors still in high demand given the strength that you're seeing in manufacturers? And is there still a shortage of skilled labor among your customers?

Yes. Yes, there is a labor shortage for them. But I meet many customers personally and usually they really choose the orders that they want to make because they have less employees. They're going to choose to go for the kitchen cabinet or the bathroom or the closet. They're going to go for the more expensive projects where they can make more money. And the more expensive is the project, kitchen cabinet, closet, and the vanity furniture in the bathroom, it's because there is more ratio of content. So that does create Good sales for us for the higher end products. So basically, this is positive. And this is what we see now, and that should continue for a while. And the customer, speaking to our sales force, we know that they are still busy for a few months. And as I said earlier, there can be a slowdown in December and January, as usual, because first quarter is always the weakest. But we expect the The business will continue to be good because there's still a lot of commercial projects as well on the go here in Canada and in the U.S. that should bring interesting sales as well because we have to keep in mind that commercial projects account for 25% of our sales. And this is a fast... The growth in this market as we speak is something like 15%, which is good.

Great, Collier, thanks. And then if we think about... that busyness that they have for a few months of visibility, accounting for, of course, the December and January slowdown. If we compare that to what they were thinking and saying last quarter before the Fed kind of took people by surprise with higher rate hikes, obviously that doesn't translate directly to renovation and remodel. But how is the, I guess, the delta, the change in the backlog that your clients are seeing?

Our clients, they don't have much back. They usually have worked for about three months in Athens. That's all we can see. But I don't think that the interest rate or whatever happened in the economy has changed the need for some consumers to change their kitchen cabinet or improve their house. But we don't have that feeling yet, but we will, like you, I think we are realistic. We don't know what's coming. As we said earlier, We can have a smoother growth in the few months to come. But we never know. We capture new business. I have personally met a couple of retail customers last week that are going to give us, you know, a few million dollars additional business. And And we see the big manufacturers also are still busy. They keep calling in. They conduct their product. We just add the new customers. I already mentioned to you that we had a big customer in the U.S. in the closet industry that has 500 stores. Actually, we're just about to have a new deal with a similar company in the U.S. as well in the closet business. So basically, we have a lot of positive news of getting increased sales of additional market nutrition. We have to keep working in that direction.

That's actually a great point. You guys made a good tactical decision to keep inventory in stock and that will give you a ton of market share when supply chains are crimped. Are you seeing any of those new customers going back to their old suppliers as supply chains untangle?

Yes, they will certainly go back to their former suppliers, some of them, but they will continue to deal with us because they have discovered that we have the largest variety of products as well as probably the best service available in North America as we speak. So that should continue on. And we have a big sales force in the U.S. as well as in Canada. The job of these guys is to make sure that the customers, they stay loyal to Richelieu.

Fantastic. And then just one last one for me. In the past, you've said that U.S. margins were trending at about two-thirds of what Canada was. Does that still hold true to that? Yep. Excellent. Thanks. I'll turn it over. Okay. Thank you.

And at this time, Mr. Lau, we have no further questions. Please proceed.

Thank you very much for attending. It's always a pleasure to talk to you. Do not hesitate to call us for more information. Bye-bye.

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