Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen, and welcome to hardware for quarter results conference call. At this time, all lines are in a mode. Following the presentation, we'll 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 for the operator. This call is being recorded on January 18, 2024. Bonjour mesdames et messieurs et bienvenue au résultat du quatrième trimestre de l'exercice 2023 de KKRI 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 18 janvier 2024. J'aimerais maintenant céder l'appel à M. Richard Lord, Président et Chef de la Direction. La parole est à vous.

Merci. Thank you. Good afternoon, ladies and gentlemen, and welcome to Richard's conference call for the four-quarter and 12-month period ended November 30, 2023. 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. We ended 2023 with a solid fourth quarter. Our sales are nearly in line with those of the same quarter of 2022 when the renovation market continued to benefit from favorable market conditions. Our inventory level continued to improve, helping generating over $70 million of cash flow from operating activities during the quarter. As for the EBITDA and net earnings, these were essentially impacted by the return to pre-pandemic operating expenses and cost incurred in projects to extend and optimize several of our distribution centers, mostly in the US. For fiscal 2023, our total sales, including acquisitions, are also in line with those of 2022. Throughout the year, We maintain our commitment to financial discipline in order to continue generating healthy margins and strong cash flows, as shown by the $271 million generated from the operation this year. 2023 was also another good year for acquisition complementary to our activities, as well as concrete achievements in our network. in line with our optimization culture. We invested in six new acquisitions, Unigrav, Usain, Quintairi-Rabelle, Altru in Quebec, then Transworld Distributing in Nova Scotia, Maverick Hardware in Oregon, and Westland Distributing in Minnesota. With this full acquisition completed in 2022, we're adding $152 million in sales on an annual basis. as well as extending our customer base and our offering and adding talented people to our team. Regarding our network projects undertaken to better seize market growth opportunities, optimize our operation and service, we are pleased with our achievements today. We have successfully completed the expansions of our centers in Atlanta, Nashville, Fort Myer, Pompano, and Seattle areas. Our brand-new Chicago center serving the retailers market is fully operational, as are the two new centers in the Minneapolis and Carstab regions. In December, we completed our Calgary expansion by consolidating the two centers into one single 250,000 square feet building. This center will become a destination for our customers architects and designers with a state-of-the-art showroom. In addition, we will be able to serve our retailer customers in Western Canada and our certain agriculture manufacturers from one single location. I'd also like to add that 2023 was a strong year in terms of innovation, as we added many innovative solutions in several of our product categories, all available in our one-stop shop network, and on interview.com for our customers. Optimizing the customer experience is always at the top of your priorities. Antoine will now review the financial highlights of the quarter and the year. Then I will conclude and we will take your questions. Antoine? Thanks, Richard. Our fourth quarter sales reached $454 million, slightly down by 0.8%. Sales to manufacturers stood at $393.1 million, down 1.2% of which 2.8% from internal decrease and 1.6% from acquisition. In the hardware retailers and renovation superstores market, we achieved sales of 61 million in line with 2022. In Canada, sales amounted to 267 million, a decrease of 6 million or 2.2%. Our sales to manufacturers reached 220 million, down 2.5%. As for retailers market, sales stood at $47 million in line with last year. In the U.S., sales totaled $136 million in U.S. dollar, same as last year. Sales to manufacturers reached $126 million in U.S. dollar, down 0.7%. In the retailer's market, sales were up 8.8%. Total sales in the U.S. reached $186 million in Canadian dollar, an increase of 1.2%, representing 41% of total sales. Total sales in 2023 reached 1.8 billion, slight decrease of 0.8% of which 1.8% from acquisition and 2.6% from internal decrease. Sales to manufacturers reached 1.5 billion, down 0.8% of which 2.9% from internal decrease and 2.1% from acquisitions. Sales to hardware retailers were down by a percent or 2.6 million to 248 million. In Canada, Sales totaled $1 billion, down 2.5%, of which 4.4% from internal decrease and 1.9% from acquisitions. Our sales to manufacturers amounted to $856 million, down by 2.4%, of which 4.7% from internal decrease and 2.3% from acquisitions. Sales to hardware retailers and renovation superstores were $198 million, down 2.9%. In the U.S., sales amounted to $548 million in U.S. dollar, down 2.7%, of which 4.4% from internal decrease and 1.7% from acquisitions. They reached $740 million in Canadian dollar, up 1.6%, accounting for 41% of total sales. Sales to manufacturers reached $506 million in U.S. dollar, a decrease of 3%, and sales to hardware retailers were up by 1.2%. Fourth quarter EBITDA stood at 58.8 million, compared with 76.7 million last year, down 23.3%. EBITDA margin stood at 13%. For the year, EBITDA was 230.4 million, down 19.8%, and EBITDA margin stood at 12.9%, reflecting the return to operating expense closer to pre-pandemic level and expenses incurred specifically for projects to expand and modernize several of our distribution centers. Fourth quarter net earnings attributable to shareholders totaled $28.5 million compared with $34.9 million last year. Diluted net earnings per share reached $0.51 compared with $0.80 in 2022. For the year, net earnings reached $111 million, a decrease of 33.8%, and $1.98 per share compared to $2.99 per share last year. Fourth quarter cash flow from operating activities before net change in non-cash floating capital balances were down 20.7% to $49.3 million or $0.88 per share. Net change in non-cash floating capital balances represented a cash inflow of $23.3 million, reflecting mainly the change in inventory and accounts receivable. Consequently, we generated $72.7 million in cash flow from operating activities compared with $3.6 million for the fourth quarter of 2022. For the year, opening activities generated a cash inflow of $271 million. Net change and non-cash working capital balances represented a cash inflow of $80.2 million, mainly resulting from improved inventory level. During the year, we paid dividends of $33.5 million, up 15% over 2022, of which $8.4 million were in the fourth quarter, and repurchased common share for $800,000. We have thus distributed a total of $34.3 million to our shareholders this year. We also invested $62 million during the year, of which $20 million was for business acquisitions and $42 million mainly for equipment to maintain and improve operational efficiency, including addition resulting from extension projects and for the purchase of a building in Drummondville, Quebec. As of November 30, 2023, net cash amounted to $24 million compared to net bank overdraft of $112 million last year. Our working capital was $622 million for the ratio of 3.7 to 1. I now turn it over to Richard. Thank you, Antoine. I will now conclude with our most recent developments. On December 1st and January 15th, respectively, we completed two new acquisitions. Olympic Forest, a specialty wood and tile distributor operating at distribution centers in Aiton, Ontario, and RapidTap, a specialty hardware distributor with one distribution center in Whitman, Ohio. These two transactions, in line with our objectives, will add sales of approximately $18 million on an annual basis. We will also benefit from the extension projects undertaken in the last three years. LucioU is well positioned to achieve good results in 2024. That will fit very well with our solid financial history of the last 30 years as a TA6 listed company. Our acquisition strategy supported by a strong balance sheet with no debt, our innovation and value added service have always served the company very well. We continue to execute them in the year to come. Thanks, everyone, and I'll be happy to answer your questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. One moment, please, for your first question. Your first question comes from Amir Patel from CIBC. Please go ahead.

Good afternoon. Richard, could you give us a sense as to how your sales are tracking through the first six weeks of the new fiscal year?

Yeah, I see. What I see, you know, the trend that we had in the last quarter of 2023 continues to be effective as we speak. You know, we don't see the first quarter with a positive organic growth because of the situation of the market. But we expect, basically, the first half to be, I would say, low growth or negative, slightly negative growth. But we do expect, I don't know why exactly, but we expect that the second half should be much better. This is where, you know, after reading what's going on in the market, we just tell our sales force and our people and our customers, we feel that the second quarter will be much better because the first quarter is also being impacted by, Some inventory left from the, you know, the pandemic period where we still have about $25 million of excess inventory which would be, you know, the whole cost. So we have to deal with that for at least the next quarter and maybe the next two quarters. But basically things are very healthy. The balance sheet is very clean. The cash flow is very clean. Our sales process is intact. What we hear from the competition is that we're doing much better, but we cannot make a clear demonstration of that. But we feel that we really continue to capture, you know, more market penetration, selling to more customers, and again, because of the new product that we have introduced. And the acquisitions, the pipeline is very healthy. Basically, that should be a good year for acquisition.

Okay. Thank you, Richard. That's helpful. So the... It sounds like, you know, last quarter you'd kind of pointed to the excess or higher warehousing costs being incurred through the first half of fiscal 24, and it sounds like you'd still expect to kind of have worked through that excess inventories by the end of Q2. Is that fair?

Yeah, that's fair. I mean, basically what I'm expecting is we'll be flat for the first quarter because with the Chinese New Year, we have to order in advance, so We should have a flat inventory for the first quarter, but then I'm expecting a reduction of around 25 million over the next few quarters.

Okay, great. Thanks, Antoine. And then, Antoine, just asking, you know, turning to even a margin, they moderated further to 13.0%. Does that mark the low of the, you know, the sort of go-forward business trend? or would you expect that to continue to trend lower for another quarter or two before inflecting higher again?

Yeah, I would expect to continue to trend lower because with a volume that is slightly down, I'm expecting the EBITDA margin to be anywhere between 12% and 13%. So in a better market environment, the 13% is achievable. In a more difficult environment, I would say around 12. So anywhere between 12 and 13.

Okay. And for a full year 24, Edwin, do you have a sense as to what sort of margin you would expect on a full year basis?

Depending of the market transition, it's between 12 and 13. Okay.

Fair enough. And so the last question I had, I noticed in prior years the company tended to announce a dividend increase with the fourth quarter results increase. Richard, is there a reason this year the board held off?

No, we think that we have increased the dividends. I don't know how much we have increased. Last time we had an increase, I think it was a big, big increase. So we thought that we should take it easy this year. But that doesn't mean that – don't forget that our dividend policy is per quarter. It's not a yearly dividend. So basically we can make change whenever it's going to be needed.

Okay. Fair enough. That's all I had. I'll turn it over.

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

Thank you for taking my questions. Hey, everybody. Hello, Zach. Yep. So in terms of gross margins and pressure there, is the effort to reduce inventory weighing on that, or are there other factors at play?

Well, the excess inventory, as I said earlier, we're still left with $25 million. That should go quite fast. I would think the first two quarters we should get rid of that. Unfortunately, this is creating some decrease of the gross margin temporarily. This is important to note. to specify it's temporary because basically our margin, you know, for the product that we have paid the right price that we sell now, we sell, you know, we have the same margin that we had before, but we'll come back to that. Basically we have to live with a little bit of some of the deflation, but as I said, you know, it's going to affect mainly the retail hardware stores because the product that we sell there is mainly from Asia. our cost would decrease. Some of our saving price would decrease, but as a percentage, the growth of them would remain the same.

That's good, Collier. Thank you. And you also mentioned that there were some project expenses weighing on EBITDA margins. How much was that in Q4 in dollars or basis points?

In dollars, in Q4, you can – could estimate around for sure a million dollars in Q4.

Perfect, thank you. And then you mentioned that the acquisition pipeline is looking pretty good. Are seller expectations coming back down to earth after being inflated during the boom time?

Yeah, that's a good point. So for sure that now we're looking at, we're basing the acquisition based on 2023. So it's going to change. It's going to certainly change. how we address these acquisitions. So yes, it's coming down to more reasonable prices.

Excellent. So 2023, very eventful for projects. Should we expect more of those in 2024? Are you happy with where the network sits?

No, we will finish with this. I think all the projects that we have to do in the finish at the end of 2023, we're in the process of a We're finishing Calgary in the month of December. In the year to come, we're going to have it in Vancouver, and we're going to have to make a change in Vancouver. But that's not a major project, though, but we don't have any chance because we cannot take any chance because actually we have some businesses that have doubled up in size there, and with which we have to operate in two different warehouses, and we're getting the stuff back and forth from one warehouse to the other. So we have to rationalize a few things, but that's going to be probably the only project.

That's perfect. Thanks. That's it for me.

Presenters, there are no further questions at this time. I will turn it back over to yourself for closing remarks.

Okay. So thank you very much for attending this call. We will always be happy to talk to you if you decide to call us. So have a good day.

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