Richelieu Hardware Ltd.

Ladies and gentlemen, and welcome to Richelieu Hardware third 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on October 5, 2023. Bonjour, mesdames et messieurs, et bienvenue au résultat du deuxième trimestre quinquennat de Richelieu. Présentement, votre ligne est 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 5 octobre 2023. J'aimerais maintenant céder l'appel à M. Richard Lord, Président et chef de la direction. La parole est à vous.

Merci, Fabio. Vous rappelez mon éditeur d'ordre. and welcome to this conference call for the third quarter and first nine-month period ended August 31st, 2023. With me is Antoine Auclair, CFO. Our third quarter performance reflects the effectiveness of our incentive to achieve good sales in our Canadian and U.S. market, slightly below the third quarter of 2022, which benefited from exceptional market conditions in the pandemic context. For the nine months today, we reached shares of 1.3 billion in nine weeks last year. Our customer-focused business model and our diversified markets in North America are effective assets, as are our innovation and value-added service strategies and our business acquisitions, which partly offset the internal decrease in sales compared to 2022. Our EBITDA margin is lower than last year, due to the return to pre-pandemic levels of operating expenses, exceptional external warehousing costs relating to temporary higher inventories levels, and the cost related to our expansion and modernization projects of some centers in the U.S. in order to accelerate social growth. Our cash flow from operating activities was strong for the third quarter, generating $104 million of inventories is currently going to lead to more normal levels, which contributes to a positive effect on cash flow. We ended the period with a financial position that remains very solid. Antoine will now review the financial highlights of the third quarter and the first nine months, then I will conclude and we'll take your questions. Antoine Chouinardier Thanks, Richard. Third quarter sales have reached 192.8 million. down 2.9%, of which 4.6% from internal decrease and 1.7% from acquisitions. It's important to note that in the third quarter of 2022, Leisure Year had achieved strong internal growth of 16%. In Canada, sales amounted to $270.1 million, down 3.4%, of which 6.4% from internal decrease, partially offset by a 2.1% positive contribution from acquisitions. Our sales to manufacturers reached 219.9 million, down 3.6%. And for the hardware debaters, sales stood at 50.2 million, down 2.7%. In the U.S., sales grew to 141.6 million in U.S. dollars, down 5.6%. Sales to manufacturers reached 131 million in U.S. dollars, down 6.8%. In the hardware retailers and renovation super source market, sales reached 10.6 million, up 12.8%. In Canadian dollar, total sales in the U.S. reached 188.9 million, a decrease of 2.3%. For the first nine months, sales reached 1.3 billion, down 0.8%, of which 2.8% from internal decrease and 2% from acquisition. In Canada, sales reached 780.6 million, down 20.6 million, or 2.6%, of which 4.5% from internal decrease and 1.9% from acquisitions. Sales to manufacturers reached 635.4 million, down 15.3 million, or 2.4%. Sales to hardware retailers and renovation superstores reached 145.2 million, compared to 150.5 million, down 3.5%. In the U.S., Sales amounted to $411.2 million in U.S. dollars, down 3.5%, of which 5.5% from internal decrease and 2% from acquisitions. They reached $553.5 million in Canadian dollars, up 1.7%, accounting for 41% of total sales. Sales to manufacturers totaled $379.8 million, an increase of $12.6 million, or 3.2%, of which 5.4% from internal decrease and 2.2% from acquisitions. Sales to hardware retailers and innovation super stores were down 6.5% compared to last year. Third quarter EBITDA reached $61 million, down 18.2 million or 23% over last year, resulting from lower sales and higher operating expense. EBITDA margin stood at 13.3% compared to 16.7% last year. For the first nine months, EBITDA reached $171.6 million, down 18.6%. As for the EBITDA margin, it stood at 12.9% compared to 15.7% last year. Third quarter net earnings attributable to shareholders soloed $29.8 million, down 34.6%, mainly due to amortization resulting from business acquisitions and extension projects, mainly in the U.S., including higher interest expense on lease obligations. Net earnings per share was $0.53 compared to $0.83 last year, a decrease of 36.1%. For the first nine months, net earnings attributable to shareholders reached $82.9 million, down 31.1%. By nature, net earnings per share stood at $1.47 compared to $2.19 last year. Cash flows from operating activities before net change in non-cash working capital balances was $48.5 million compared to $60.9 million last year. Net change in non-cash working capital items represented a cash flow inflow of $55.1 million. Except inventories continue to reduce as planned with a positive effect of $24.5 million. As a result, operating activities represented a cash inflow of $103.5 million in the quarter compared to a cash outflow of 2.7 million in 2022. For the first nine months, cash flows from operating activities represented a cash inflow of 192 million compared to cash outflow of 37.9 million last year. For the third quarter, financing activities used cash flow of 16.9 million compared to 17.2 million last year. Dividends paid to shareholders of the corporation amounted to 8.4 million compared to 7.3 million in the same period of 2022. For the first nine months, financing activities used cash flow of $52 million compared to $46.9 million in 2022. Dividends paid to shareholders amounted to $25.1 million compared to $21.8 million last year. During the first nine months, we invested $42.5 million, $20 million for safe business acquisition, and $22.5 million mainly for distribution center modernization and extension projects, investments in equipment to maintain and improve operational efficiency, as well as for IT infrastructure development. We continue to benefit from a healthy and solid financial position with a working capital of $606.1 million for a current ratio of 3.4 to 1 and an average return on equity of 15.5%. I now turn it over to Richard. Thank you, Antoine. The integration of recent acquisitions is in progress, as are the expansions and consolidation projects underway in our network. We have finalized the consultation of our centers in the Atlanta and Nashville regions, and our Seattle center is now fully operational. We are also progressing with the Fontana Center extension and plan to complete the consultation of our centers in the Cagay area in the first quarter of 2024. We expect to end the year on November 30, 2023, with a sustained performance and a solid position by relying on successful strategies that have always served us well. mainly ongoing innovation, value-added service, market penetration, and business acquisitions, which are our key roadblocks. Thanks, everyone. We'll now be happy to answer your questions.

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press star, followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. Your first question comes from Ariana Millen with JBC Capital Markets. Please go ahead.

Hi, good afternoon. Richard, can you speak to what kind of organic decline you saw in September and when you expect to return to positive organic growth?

What we see so far this year, I think it's very encouraging. If you remember well, you know, from the 2019 to the end of 2022, our saver increased by 70%. The current performance is a clear demonstration, though, that we keep up with those market share that we gained during the pandemic, and we're very happy about this, and we consider our performance very satisfactory in the circumstances for the current market.

Thanks. That's helpful. And, Richard, can you speak to the M&A pipeline and whether you've seen any moderation in vendor expectations?

Yeah, the pipeline is quite healthy in the U.S. and in Canada as well. So we're working on some opportunities as we speak. But the M&A environment is still very positive for us.

Okay, thank you. And then just with respect to your excess inventories, when do you expect to work through them and what are the risks of further price deflation as you look to normalize inventories?

I'll probably answer for the definition. Regarding definition, there's going to be some definition for certain products, mainly for those that come from Asia. But as a percentage, the growth margin should be maintained after we have passed the excessive inventory. So basically, we look forward to make sure that we stabilize the situation with new inventory at the new cost, and then we're going to see, you know, growth for the market and everything else coming in the future. On the short term, we have to live with that situation, but I think at the end of the first half of 2024, we should be through everything, not one. And regarding inventory, we're down $65 million since the beginning of the year so far. We've mentioned that we were expecting $60 to $80 million in 2023. It's going to be closer to $80 million. And we should probably see another $29 million somewhere in the first half of next year. So the inventory should come to a more reasonable level in the middle of next year.

Okay, great. Thank you. And just the last question I had was, Antoine, are you able to provide us with some perspective on what type of data margins you're targeting for 2024?

Yeah, we're currently at 13%, and with the market conditions that we're We're seeing now I think that the 13% is a reasonable level of EBITDA.

Okay, thanks. That's all I have for now. I'll get back in the queue.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the 1. Your next question comes from Zachary Evershed with National Bank Financial.

Hi, good afternoon. It's actually Thomas calling in for Zach. consolidation of Nashville and Atlanta, and when do you expect that shows up in the results?

Yeah, we just ended the consolidation of our Atlanta and Nashville centers. Our Seattle center is now fully operational, so we should start to see benefit from those initiatives early next year.

Okay, thank you. Do you feel the environment has stabilized enough that we can call a bottom here?

I think that's what I would say. I would say that we have visibility up to middle of next year, and we see the environment staying pretty flat as it is today. Okay. I think that's the right answer for Mark, because what we see, the current situation, we don't see any positive sign as to, I don't think it's going to get worse, but we don't think it's going to get better anyways. But we, as I explained at the beginning of the meeting, the fact that we maintain the market share that we gained during the pandemic, I think it's a very, very, very positive for us. So that means that our sales have increased and it has been compensated by an economy which is not as good. But our goal is to continue to work hard in order to increase on effective nutrition you know, and to make sure that if the sales decline, that it's minimal, as we've seen so far. But that's really the goal of our team, both in the U.S. and in Canada. There is a lot of work that's going to be done in order to keep up with those market share.

Thank you. And last one from you here. I think previously you mentioned $15 million in inventory reduction next year. You just called out $20 million in the first half. Is $50 still the number for the full year?

Basically, this year is going to be slightly on the high side, so with the level of sales that we see today, $20 million for the first half is reasonable, and I think we'll see what happens after that period.

Thank you so much.

If there are no further questions, please proceed.

If there's no more questions, thanks again. It's always a pleasure to talk to you and meet with you at your convenience. Thank you very much and have a nice day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.