Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen. First of all, I have to apologize for my voice. I have a cold, so please, I will try to do my best to handle that speech. And welcome to Pressure Use Conference Call for the first quarter ended February 29, 2024. With me is Antoine Leclerc, CFO. As usual, know that some of today's issues include forward-looking information, which is provided with the usual disclaimer, as reported in our financial findings. Our financial year began with a good first quarter. We pursued our acquisition strategy, closing two new acquisitions, followed by a third one on March 27. We achieved a good level of sales equivalent to the first quarter of 2023, which is appreciable since first quarter sales last year continued to benefit from favorable market conditions. This result reflects a significant contribution of our acquisitions and market development initiatives. Supported by our strategies of value-added service, innovation, and market segment diversification, it should be remembered that the first quarter is always the weakest period of the year. Legating our first quarter margins, they were affected by two main factors. The lower gross margin and the startup period of centers expanded in 2023. Despite the significant reduction in our inventory over the past year, we still have certain inventories purchased at higher price than current costs. The sale of these products at market price has had a negative impact on our gross margin. We expect the situation to be resolved as these products are reordered. Secondly, as already announced, with several of our distribution centers underwent expansion and modernization projects in 2023, including our new Calgary Center, which went operational last December. The startup and development of these centers, in addition to being impacted by current market conditions, have also affected our margins downwards. We are actively working on these expanded and modernized centers in order to accelerate their startup and market development. As for acquisition, we are very pleased with the three businesses we have acquired since the beginning of the year. Olympic Forest Products is a distributor of specialized lumber and paddle products with the distribution centers in Arian, Ontario. And Rapid Start is a distributor of specialty hardware with the distribution center in Whitman, Ohio. On March 27, we completed the acquisition of Allegheny Flywood, a distributor of specialty panels and decorative surfaces, which operates distribution centers in Pittsburgh and downtown Pennsylvania, as well as in Cleveland, Ohio. In addition to contributing approximately $6 million to annual sales, these three transactions add new customers, complementary products, and expertise, and strengthen our presence in this market. I now hand over to Antoine Thanks, Richard.

First quarter sales reached $407 million, up 1%, a 0.4% internal decrease, offset by 1.4% growth through acquisitions. Sales to manufacturers stood at $350 million, up 1.6%, mostly from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of $57.3 million, down $1.6 million, or 2.7%. In Canada, sales amounted to $232 million, similar to last year. Sales to manufacturers reached $188 million, and hardware retailers and renovation superstores' market sales stood at $44.5 million, down 2%. In the U.S., sales grew to $130 million in U.S. dollars, up 1.7%, 1.1% from internal growth, and 0.6% from acquisitions. They reached $175 million in Canadian dollar, an increase of 1.6%, and represented 43% of total sales. Sales to manufacturers reached $120 million in U.S. dollar, up 2.2%, 1.7% from internal growth, and 0.5% from acquisitions. The hardware retailers and renovation superstores market, sales were down 4% from the corresponding quarter of 2023. First quarter EBITDA reached $40.4 million, down $8.7 million, or 17.7% over the first quarter of 2023. The lower growth margin and our 2023 expansion projects being in startup phase in the current market condition affected the EBITDA margin downwards. As a result, the EBITDA margin was 9.9% this quarter. First quarter net earnings attributable to shareholders totaled $15.2 million, down 35.7%. Diluted net earnings per share was $0.27 compared to $0.40 last year. First quarter cash flow from operating activities before net change in non-cash working capital balances was $35 million or $0.62 per share. The net change in non-cash working capital used cash flow of $34 million, mainly reflecting the increase in inventories and the decrease in accounts payable and accrued liabilities over while accounts receivable and other items represented a cash inflow of $1.2 million. As a result, operating activities provided a cash inflow of $0.5 million compared to a cash inflow of $18.8 million last year. We paid dividends of $8.4 million to shareholders, and we invested $15.5 million, including $7.4 million for two business acquisitions and $8 million in CapEx, of which $3.5 million relating to expansion projects. At the end of the quarter, the financial situation was healthy and solid with working capital of $623.4 billion and almost no debt.

I now turn it over to Richard. Thank you, Antoine. In conclusion, our priorities are to pursue our innovation and business acquisition strategies, develop synergies with our acquisitions, control costs, and develop strategic markets. We continue to build on our strengths, our team, our value-added service with logistics tailored to customer needs, Our financial solidity and our efficient network enables us to extend our coverage in the North American market more and more. With our ability to adapt to changing market conditions, we continue to seize and create opportunities while remaining service, innovation, and result-oriented. Thanks, everyone. I would be happy to answer your questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the 1. If you'd like to withdraw a question, please press the star followed by the 2. One moment, please, for your first question. Your first question comes from Amir Patel from CIBC Capital Markets. Please go ahead.

Good afternoon. Richard, EBITDA margins dipped below 10% in Q1. Do you think the first quarter marked a trough for margins? And what kind of recovery would you expect on the margin front into second quarter?

I can't explain the drop in the EBITDA margin because of what we call those inventory costs that are higher than the current costs. So that has cost us in the quarter $3.5 billion dollars. The modernized project that we achieved in 2023 increased our expenses by $2.5 million. I think these investments were pretty good and would bring a lot of sales in the future, but since the market is slow as we speak, so we don't recover as quickly as we were expecting. This also increases expenses. As you know, we have not started yet to increase our own selling pricing. That should happen early today. in the fourth quarter and maybe in 2025. For the time being, we cannot increase our pricing for the reason that you already know. But our costs have increased at the same time. So if you take the salaries and the rent, that type of expenses have created $1.5 billion of additional expenses. So basically, I think things will improve. The more it is going to go, the more it's going to improve. Mainly, I would say from the first third quarter, we expect the situation to improve.

And, Anil, one element to consider is that the Q1 is always the weakest period. So usually Q2, Q3, and Q4 are around two points higher than Q1 due to a lower volume in Q1 versus the other quarters.

Okay, Antoine. So it's fair to say then, all being equal, if it's two points higher, you'd be sort of north of 12% would be kind of the low end for Q2? Yeah. Okay. Fair enough. And then are you able to, Richard, comment on sales comps across the business in the month of March?

Yeah, what we've seen is that the kitchen cabinet industry business has decreased by 3.7%. I would say the worst decrease comes from the residential furniture. In Eastern Canada, for example, the residential furniture has decreased by 15%. So I think the people making residential furniture, as we speak, at a hard time. So, basically, this is the toughest market that we're dealing with. And I would say we went with a market that is still sustaining good. Like the middle work, what we call a commercial innovation, it's higher by 4%. So, it's not that bad. And office furniture is down by 2%. And the retail market, as you know, is down by 2.7%.

Okay. Fair enough. That's helpful. I'll get back in the queue for now. Thanks a lot.

Ladies and gentlemen, again, if you'd like to ask a question, please press star 1. Your next question comes from Zachary Evershed from National Bank. Please go ahead.

Thank you for taking my questions, and sorry to hear you're not feeling well, Richard.

I feel pretty good. It's only a cold, you know. It takes more than that.

Perfect. So organic growth is only marginally negative in the quarter. Would you say that end market demand is recovering more quickly than you anticipated at the beginning of the year?

It's not one, Zach. It's still soft, but what you need to understand is that when we compare ourselves with Q1 2023, Q1 2023 was equal to 2022, so It's still very healthy out there. So we think that we're more conservative on the first half of the year, but we think that the second half could be stronger than the first half.

In the market situation that we know, I think achieving the sales we have achieved, I think it's pretty good. I think we performed very well for the market situation. I think our people are all there doing their job well. selling the products and the promoting and whatever has to be done. And we think in the circumstances, we think that these results are very, very good.

Thank you. And then you identified inventory costs as being a $3.5 million drag in the quarter. When do you expect to work through the remaining high-priced inventory? We have to reorder all the products immediately.

So basically, we think that starting in the third quarter, we're going to see a substantial improvement. But unfortunately, for the financial statement, as you understand for the IFRS, we have to work with the average cost. So if we buy a new product with a 10% less regarding the cost compared to the cost that we had before, That means that the economy is not going directly into the growth margin because we have to work with the average cost. But basically, things will improve.

Gotcha. Thanks. And then if we look at the operating expenses related to expansion projects, those are categorized as temporary in your press release. Does that mean that your fixed cost absorption is temporarily low while you're ramping up volumes? or are there specific items that you won't be paying for in the near future?

You're right. Your first comment is pretty much the one. So, of course, we have some moving expenses in there, but the main reason is the fact that we're in ramping mode, so it takes some time to absorb the fixed costs. So it had an impact of over $2.5 million in the EBITDA for the quarter.

Thank you. That's very clear. I appreciate that. And then given your anticipation of an improving H2 versus some of the forecasts that we're seeing for an overall declining market in repair and renovation in the U.S., how do you feel about your current in-sale capacity, the amount of distribution centers you have in the U.S.?

I think the network, with all the investment that we've done in the network, I think we're we're there to capture this effect that we're in good shape. On that front, we are in good shape.

Thank you very much.

And there are no further questions at this time. I will turn the call back over to Richard Lorre for closing remarks.

There's no more questions. Thanks to all of you again. We're always pleased to talk to you if you have the desire to call us.

Bye-bye. Ladies and gentlemen, this concludes your conference call for today. You may now disconnect your lines. Thank you.