Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen, and welcome to Reshow Your Hardware Fourth 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 this call is being recorded on January 19, 2023. Bonjour, Mesdames et Messieurs, et bienvenue au résultat du quatrième trimestre quinquennat qui se lie. 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, veuillez s'il vous plaît appuyer sur l'étoile et les zéros. Veuillez prendre note que cet appel est enregistré aujourd'hui le 19 janvier 2023. J'aimerais maintenant céder la parole à Monsieur Richard Lord, Thank you.

Good afternoon, ladies and gentlemen, and welcome to the Richard Hughes Conference call for the fourth quarter and 12th month, period ended November 30, 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. First, let's look at our fourth quarter, where our sales benefited from both acquisition and internal growth. The sales increase was driven by a strong performance in the manufacturer's market in the U.S., where the two acquisitions closed in the first quarter made a major contribution, namely Compute Distributor, HGH Hardware, and National Builders Hardware jointly They operate nine distribution centers in six different states. As for the retailers and innovation superstore market, sales remain stable over the last year. We closed our fourth acquisition of the year in September, KKRIDONO, a specialty hardware distributor operating one distribution center in Montreal. The four acquisitions closed in 2022 represent additional sales of approximately $125 million on an annual basis. As for 2022, it was another year of sound growth fueled by both internal growth and acquisitions. We are very pleased with the performance achieved in all our markets, especially in the U.S., where the growth was 42.2%, now representing 40% of our total sales. Our innovation and acquisition strategies, our focus on customer service, the diversification of our market segments, and our successful website, richelieu.com, all these trends contributed to bear fruit and be our best growth levers. I'm also pleased to announce that the Board of Directors approved this morning a rise of 15.4% in our quarterly dividend to 15 cents per share. Antoine will now review the financial highlights, and then we'll conclude with the latest development and outlook. Thanks, Richard.

Our fourth quarter sales reached $458 million, up 14.9%. Sales to manufacturers stood at $398 million, up 17.4%, of which 78% from internal growth and 9.6% from acquisitions. In the hardware retailers and renovation superstores markets, We achieved sales of $60 million in line with 2021. In Canada, sales amounted to $274 million, an increase of $13.4 million, or 5.2%. Our sales to manufacturers reached $226 million, up 5%. As for retailers markets, sales stood at $47.5 million, up 5.8%. In the U.S., sales totaled $136 million in U.S. dollars, up 24.1%, of which 2.8% resulting from internal growth and 21.3% from acquisitions. Sales to manufacturers reached $127.5 million in U.S. dollars, up 29.4%. In the retailers market, sales were down by $2.5 million in U.S. dollars. Total sales in the US reached $184 million in Canadian dollars, an increase of 33.2%, representing 40.2% of our total sales. Total sales in 2022 reached $1.8 billion, up 25.2%, of which 13.4% from internal growth and 11.8% from acquisition. Sales to manufacturers reached $1.6 billion, up 28.9%, of which 15.9% from internal growth and 13% from acquisition. These increases are the result of sustained demand in the renovation market in 2022, as well as higher selling price. Sales to hardware retailers grew by 6.3%, or $14.9 million, to $251.5 million, mostly from acquisitions. In Canada, sales total $1.1 billion, up 13.7%, of which 10.3% from internal growth and 3.4% from acquisitions. Our sales to manufacturers amounted to $877 million, up by 14.2%, of which 11.7% from internal growth and 2.5% from acquisitions. Sales to hardware retailers and renovation super stores were $177 million, up 11.7%. In the U.S., sales amounted to $562.5 million in U.S. dollars, up 42.2%, of which 15.4% from internal growth and 26.8% from acquisitions. They reached $728 million in Canadian dollars, up 46.9%, accounting for 40% of total sales. Sales to manufacturers reached $521 million in U.S. dollars, an increase of 49.7%, and sales to hardware retailers were down by 12.9%. Fourth quarter EBITDA stood at $76.7 million compared with $71.3 million last year, up 7.5%. EBITDA margins stood at 16.8%. For the year, EBITDA was $287.4 million, up 22.6%, and EBITDA margins stood at 15.9%. Fourth quarter net earnings attributable to shareholders totaled 44.9 million compared with 44.6 million last year. By use of net earnings per share reached 80 cents compared with 79 cents in 2021. For the year, net earnings reached 168 million, an increase of 18.8% and $2.99 per share compared with $2.51 per share last year. Fourth quarter cash flow from operating activities before net change and non-cash working capital balances were up 8.3% to $60.4 million or $1.07 per share. Net change and non-cash working capital balances used cash flow of $58.6 million. For the year, they were up 22.7%, totaling $224 million or $3.98 per share. Net change in non-cash working capital balances used cash flow of $260.7 million, mainly from spike in inventory, which resulted from the higher product costs and the easing of the supply chain challenges, including the acceleration of delivery times, especially from Asia. During the year, we paid dividends of $29 million, up 50% over 2021, of which $7.3 million were in the fourth quarter, and repurchased common share for $12.3 million. We have thus distributed to a total of $41.4 million to our shareholders this year. We also invested $67 million during the year, of which $44 million was for business acquisitions and $23 million for equipment to maintain and improve operational efficiency, including investment in ongoing extension projects. As of November 30, 2022, bank overdraft net of cash amounted to $212 million. Our working capital was $563 million for a current ratio of 2.6 to 1, and the return on average shareholder's equity stood at 22.7%.

I now turn it over to Richard. Thanks, Edwin. We are constantly looking to acquire new businesses in line with our criteria and integrate them by sharing our value and developing synergies. Just recently, in January, we concluded four new acquisitions that will contribute to diversify our offering and our customer base. Namely, Quintaili-Radel, a distributor of specialty hardware with one distribution center in Terrebonne, Quebec. Transworld Distributing, a distributor of industrial fasteners with one distribution center in Batmort, Nova Scotia. two companies offering custom products, including 3D scanning centers for the architectural and industrial market. They are located, respectively, in Drummondville and Montreal. These four new acquisitions will add approximately $18 million in sales on an annual basis. Our expansion projects are progressing well, mainly in Atlanta, Fort Myer, Nashville, and Pantano. We just opened our new CalSTAR location close to New York City, and we will be up and running in Minneapolis for February. As for Chicago, our new location servicing retailers will be fully operational in the coming weeks. Other extension projects are currently under review, and USAID will continue to be a strong driver of our growth. To conclude, to show you as a strong strong financial foundations, skills, and expertise to serve its customers with a distinctive service approach. As well, we have a solid track record in product innovation and business acquisitions, which remain our two main road drivers. In 2023, we will continue to build on this momentum and our strength in order to achieve good results with the involvement of our great team. We will pursue our market development, innovation, and acquisition strategies while giving priority to service, productivity, synergies, and sound financial management. Thank you, everyone. And I'll be happy to answer your questions.

Thank you, Mr. Locke. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to whistle your question, please press star followed by two. And if you are using a speakerphone, we do ask that you please lift a handset before pressing any keys. Please go ahead and press star 1 now if you have a question. And your first question will be from Zachary Evershed at National Bank Financial. Please go ahead.

Good afternoon, everyone. Congrats on the quarter.

No.

So I was hoping you could give us a little bit more color on the inventory breakdown, maybe paint a picture for us of where you want to get that number down to, what's higher due to pricing, and then what's attributed to new distribution centers and acquisitions in your inventory?

Yeah, Zach, I will answer that one. Basically, just product cost increase amounts to approximately $45 to $60 million just from cost increase, and $30 million from acquisition and new extension, so basically close to $75 million on those elements. But we're pretty much at the highest point. In January, we were pretty much at the highest point. So you looked at the, you had the November levels, it's going to increase in December, slight increase in January as well. We're going to be at the top of the mountain in January, stabilize in February, and it will go down substantially during 2023.

And how much do you think you can pare away to get to a stabilized inventory level?

Between, I would say, between $60 million to $80 million.

That's helpful. Thanks. And then, Richard, maybe you could give us some commentary on pockets of weakness and strength that you're seeing in your end markets and product categories?

What we see so far, the market is still quite good, even though the first quarter is always, always good. although it's a quarter as you can remember. But also what we have seen this year more than ever than our small customers until January 15, they were still on vacation. But in spite of that, our sales, you know, do quite well. It's going to be hard. I don't think we can beat the performance that we had last year, though. But the market is still good. We see the retail market being flat. It's slightly down in the U.S., but it's only for timing, purchasing of timing for customers. And speaking with our sales management and our sales people, they see that our customer would be busy for at least the next six months. to a very decent level. So basically, all the product lines are doing pretty well so far, as well as most of our customer segments. And also, I think our new acquisition will also contribute to a nice growth because now they have access to more products. They have access to the distribution system and distribution marketing strengths. So basically, that should generate more sales. And we have various programs in order to increase our sales, as usual, in the U.S., as in Canada, in order to get more sales per customer and gain more new customers as well. So basically, whatever the circumstances might be or will be, we're still doing everything in terms of many strategies in parallel in order to keep increasing our sales.

Great, Collier. Thanks. And so I'm hearing you on gaining new customers and growing your sales per customer. And I noted that you flagged that gross margins were stable in the quarter. What are your thoughts on the extent of price deflation in your product categories in the year ahead?

There will be a price deflation for certain products for a while, there is no doubt, because of the excess inventory, the higher cost that we have, namely for some products for the for the retailers. That should temporarily affect our growth margin, but especially, for example, for the fastener and fitting business, because we have excess inventory and that instead of it, we have direct import for certain of our customers from Asia directly to our customers. This year, we're going to use our inventory instead of sending a product at reduced margin coming directly from Asia. So we have to carry the cost of having this product in our inventory, but we're going to use the product which is already in our inventory to ship to our customers at a lower margin. That will affect, temporarily, our margin. We don't expect any disaster, but we're going to have certain decrease of certain product lines We don't see the effect as being dramatic in a residual result if we look at the next couple of quarters.

Gotcha. Thank you. Previously, you've given a range of maybe 14% to 15% EBITDA margins in a post-pandemic world. Do you think that's still the case with what you're seeing in terms of inventory discounts and that kind of thing for 2023?

Yes, it is.

Short and sweet? Yes. And then just one last one, if I can. On customers that you won during the disrupted supply chains because RCH was able to keep inventory better than competitors, what do you think your retention rate is on that new business, the market share gains you made there?

I think the retention is something higher than 80% because these customers, they have discovered us. They see the large variety of products that we have. So they will continue to buy from us because they have experience, a good service, and they see the large variety of products, the easiness of using our website, and to reach our people, just thinking of the sales rep or the customer service people. So basically that keeps, you know, improving the whole thing. And basically we're quite optimistic with this. We also have to mention that. regarding the sales that we have to keep in mind that before, you know, last year our customers also bought more product from us than they should have bought because they were scared. They wanted to make sure that they had the right, more inventory than they would really need in order not to lose anything on their project. Our customers are in excess of inventory, and they also know that we are in excess of inventory. So if they need something, as we speak now, they just buy the quantity they need now, because they know that Richelieu has a lot of inventory, so they're not scared as to Richelieu could miss something in the near future. So basically, that does not help to to create more sales, but as I said earlier, whatever those circumstances, we still do well compared, even though we will not be close to the performance that we had last year, but sales are still holding, I would say, healthy.

Fantastic. Thank you. That's all I had. I'll turn it over. Thank you.

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. And at this time, Mr. Law, we have no other questions. Please proceed.

It was a pleasure to talk to you. Thanks again. And whenever you need to talk to us, you know where we are. Thank you very much.

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, would you ask that you please disconnect your lines.