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 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 immediate assistance, please press dial 0 for the operator. This call is being recorded on April 6, 2023. Bonjour mesdames et messieurs et bienvenue au résultat du premier trimestre quinquairie Richelieu. Présentement, vos lignes sont en mode d'écoute seulement. Suite à la présentation, nous allons procéder à une carrière 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 6 avril 2023. J'aimerais maintenant céder la parole à M. Richard Ward, président et chef de la direction. À vous la parole.

Thank you. Good afternoon, ladies and gentlemen, and welcome to the first quarter ended February 28, 2023. With me is Antoine Leclerc, 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. We started 2023 with good results for the first quarter. and we are pleased to have seized new acquisition opportunities as we completed four transactions in Canada earlier this quarter and one in the U.S. on April the 3rd. It's important to note that the competitive numbers of 2022 were exceptionally strong, benefiting from the business context resulting from the pandemic. Just in the first quarter of last year, sales increased by 29.2% and EBITDA by 40.8%. In the first quarter of 2023, our sales increased by 4.8% or 18.5 million, including 1.8% organic growth and 3% from acquisition to 403 million. We are also proud to mention that our U.S. sales now represent 43% of our total sales. With the acquisition of Quinteri Radel, Transworld Distributing, Unigrab, and Usain in January 2023, which strengthened our presence in Eastern Canada. And after the end of the quarter, we completed the acquisition of Maverick Hardware in Eugene, Oregon, which reinforced our presence in this market, where we already operated a distribution center in Portland. With this final acquisition, we add $22 million in annual sales. New customers complementary products, and things that are experienced in the market. The expansion, modernization, and opening of centers in the U.S. have progressed well, including Atlanta, Nashville, Pompano, Seattle, and Chicago. We moved our Fort Myer operation in a brand new building, and our new location in CalSTAS, New Jersey, and Minneapolis are now open for business. In addition, by the end of the year, we will consolidate two centers in the Calgary area in which we will include a first-class showroom while increasing our service capacity in Western Canada. Following these recent developments, we are now operating 113 interconnected centers, 50 in Canada, 60 in the U.S., plus two manufacturing facilities in Canada. Antoine will now review the financial highlights of the quarter, and then I will conclude and will take your questions.

Thanks, Richard. First quarter sales reached $403 million, up 4.8%, on which 1.8% from the global and 3% from the positions. In comparable currency to the first quarter of 2022, total sales growth would have been 2.2% per quarter. Sales to manufacturers stood at $244 million, up 5.4%, of which 2% from internal growth and 3.4% from acquisitions. In hardware retailers and innovation superstores market, we achieved sales of $59 million, up $0.8 million, or 1.4%. In Canada, sales amounted to $231 million, same as last year. Our sales to manufacturers reached $185.5 million in hardware retailers and innovation superstores market, sales stood at $45.4 million, up 3.4%. In the U.S., sales grew to $127.7 million in U.S. dollars, up 5%, all from acquisitions. They reached $172 million in Canadian dollars, an increase of 11%, and represented 42.7% of total sales. Sales to manufacturers reached $118 million in U.S. dollars, up 6.2%, 0.7% from the overall growth and 5.5% from acquisitions. Hardware, retailers, and renovation superstores market sales were down 10.6% from the corresponding quarter of 2022. First quarter EBITDA reached $29.1 million, down $4.6 million or 8.6% over the first quarter of 2022. Both margins remained stable and the EBITDA margin was 1.2% compared to 14% last year. First quarter net earnings executable to shareholders, so $22.4 million, down 25.6%. In addition to the fact that 2022 first quarter was a period where our financial results were especially strong, the factors that also affected our results were mainly the return of operating expenses closer to pre-pandemic levels, as well as outside warehousing costs due to temporary and ventilated increase. Amortization and costs related to our U.S. extension project, as well as the interest rate on the line of credit. Financing net earnings per share was $0.40 compared to 53 last year. First-order cash flow from operating activities before net changes on cash flow and schedule balances was $38 million, or $0.68 per share. The net change in non-cash flow and cap used cash flow of $22 million, only reflecting the decrease in accounts payable and tax payable, while accounts receivable represented a cash inflow of 8.4 million. As a result, operating activities represented a cash inflow of 16.5 million, compared to cash outflow of 37.5 million in Q1 2022. Regarding our inventory position, as indicated last January, inventory level stabilized in February, and started to decrease their assets. We paid dividends of $8.4 million to shareholders, and we invested $22.3 million, including $15.8 million for four business acquisitions and $6.5 million in capex. At the end of the quarter, financial situation was healthy and solid with 14 capital of $564.9 million and an average return on shareholders' equity of 21%. I now turn it over to Richard.

Thank you, Antoine. We are confident we will seize and create new short and long-term growth opportunities and deliver solid future results. We stay alert and are monitoring market conditions while keeping a disciplined approach in cost control. We will build our strengths with the exceptional quality of our team, the distinctive quality of our service, our ability to innovate, to pursue strategic acquisition, and to integrate them efficiently. while using our flexibility to adapt to changing market conditions. RicherView remains customer, innovation, service, and results-oriented. Thanks, everyone, and I'll be happy to answer your questions.

Thank you. Ladies and gentlemen, we will now take questions from our analysts. Should you have a question, please press the star, followed by the one on your touch-tone phone. If you'd like to retry a question, please press the star, followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Amir Patel from CIDC Capital Markets. Please go ahead.

Hi, good afternoon. Could you comment on how demand has fared in March for both on the manufacturer's side and retailers' side?

Yeah, the demand for the month of March, as we speak, was... high single digit down which is still very good performance considering that last year for the same month we had an increase of remember that 18% for the month of March organic growth so basically we compare ourselves with the best month ever the last month of March 2022 was our best month ever in this company so we sold something like $130 million so basically we quite satisfied with the the current sales performance in the spite of seeing, you know, a high single-digit decline on sales. But in the circumstances, we still think it's very good.

That's helpful. And the high single-digit decline, how much of that is price versus volume?

Nothing. We have not seen any price. We've managed the business to make sure that our pricing was stable. for the quarter and for the month as well. So, so far, we didn't see any deflation in our pricing.

And, Richard, you only look back in recent years, there's been quite a big increase in organic growth. You know, I don't know if you have the figure on hand, but do you have a sense as to, from the sort of beginning of the pandemic, you know, kind of early 2020, how much price inflation you've seen through your results and What type of deflation would you still expect to play out just given maybe pass-throughs on freight and some moderation maybe on some products?

Deflation last year in 2022, I think, was something like 10% due to the price increasing because of what you mentioned for the freight. We see the freight now coming back to normal, but since we – We don't receive much inventory as we speak because we still have to decrease the inventory that we already have on hand, which is already priced at the high cost. But I think all the competitors have to live with the same circumstances. But the sales are still maintaining good, so we expect to have one turn of our inventory close to before the end of the second quarter. So things should improve. And also, we have to consider that we with price or inventory based on average cost. So basically, it's going to be almost a full year before the cost come back to where it should be as a normal costing. And again, that's not negative because that does apply to any business in the world. We have to deal with the same circumstances. So basically, that's about it.

Okay. Well, thanks. That's welcome. Just the final question I had. Antoine, you know, it's been kind of with another quarter of visibility. Do you have a sense as to you know, where you would expect EBITDA margins to stabilize, you know, I'm thinking maybe on a 24 basis? Low 14, I mean. Low 14. Okay, that's great. That's all I have for now. I'll turn it over. Thanks.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Zachary Evershed from National Bank Financial. Please go ahead.

Thank you. Good afternoon. Thanks for taking my question. Good afternoon. So you mentioned that March organic growth was down high single digits, but perhaps there's a lower bar in the other months for the quarter since it was an all-time high in March. What are your hopes for the pace of organic growth in the quarter as a whole?

Again, the second quarter last year was very strong in terms of growth as well. So there's no way we're going to match the growth that we had last year. But what we see now, I guess it's the trend that we're going to see for the quarter. Antoine, what would you say about that? The growth was what in the total?

The second quarter growth last year was 11% in Canada. I'm talking about the internal growth and 23% in the U.S. It was very strong, Joe.

Basically, if we maintain the performance that we had in March, I think that's still going to be good. Hopefully, we're going to do better.

Gotcha. And inventory rose quarter over quarter. You're hopeful for a decline this year. Can you give us an update on how that's trending so far in Q2 and where you hope to end the year?

It's the same answer as the one in January, Zach, so Increase in December and January, stabilize in February, and it started to decrease in March, and the plan is to decrease from 60 to 80 million.

That's great. Thanks. Quick questions on your organic expansion projects. For locations where there isn't a showroom in place, how much does it cost to set one up and do all of your facilities? lend themselves to an extra room in use in that way.

This is the key when we make some expansion projects. We rent more space and we either improve the full room or innovate the new full room. A new full room would cost something like $250,000, while the expansion of the warehouse requires some racking. That's it. Racking for, what, 50,000 square feet Warehouse, we're talking about maybe $200,000.

That's helpful, thanks.

And Zach, in the quarter, in the $6.5 million capex, you have approximately $2.5 million for all of the extensions that we're talking about, either the new ones or the ones that we're moving.

Okay, that's a great color. And then on those expansion projects, what's left to do in the quarter's head?

We're going to finalize the Nashville one. It should finalize up in the second quarter. We're going to finalize Atlanta as well, Seattle. So a lot of things will be moving in the second quarter, and after that it should be business as usual if we don't have any more projects.

Thank you. How do clients generally respond when you consolidate facilities? Is there any loss in relationships there? Does it carry over well?

I think our customers will be happy when we expand our space because they know that we're going to have more products. So very often we add decorative board panels, for example, which our customers like very much. I'm sure you have that type of product because we sell higher-end decorative panels. And our customers are very well attracted by those panels because it does create more value for the product that they sell to their own customers. So basically, it is very positive.

Great, Collier. Thanks. Then just one last one. Gross margin seems stable, no pricing deflation yet. Could you give us more color on the return of operating expenses to closer to pre-pandemic levels? How will that impact margins in future quarters?

I think that's where we should be. In the last two years, we've mentioned it. So it was the expenses were very low. People were not traveling. Promo expenses were very low. So now it's back in terms of payroll because the cost structure actually is pretty simple. We have people and we have locations. So in terms of payroll, we're where we should be. And regarding the rent, we have all of the new locations in place. The rents are increasing, but where we should be. So we are at the level required to maintain the business volume, but in terms of ops costs, in terms of percent, we're still better than what we were before the pandemic.

That's helpful. Thanks. I'll turn it over. Thank you.

Richard, there are no further questions at this time. Please proceed with your closing remarks.

Thank you very much for attending this call. If anybody wants to call us, we are open to talk with you. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.