Richelieu Hardware Ltd.

Good afternoon, ladies and gentlemen, and welcome to this year's conference call for the second quarter and first half ended May 31st, 2024. With me is Antoine Auclair, 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. We continue to make good advances in the second quarter, thanks notably to the valuable contribution of our acquisitions the strong support of our market development strategy and our value-added service. As a result, we achieved an increase in sales over the competitive quarter of 2023, which is appreciable in the current market condition. This rise reflects the good performance in our manufacturer's market, especially in the U.S., with a growth of 8.7% in the quarter. Our sales to retailers and renovation super stores were down in Canada and U.S., resulting from a softer market and the impact of some price reduction. Nevertheless, we are currently working on many interesting projects with retail customers that will generate additional sales in the coming periods. In addition, the centralization projects in Western and Eastern Canada will continue to support our growth in this market. We also focus on the ramp-up and development of our centers that we were expanding and modernizing in 2023. We are happy with these investments that were implemented to better service our customers, support our growth, and access new territories. We already see significant increase in sales versus last year in all of these projects. I now hand it over to Antoine for the financial review of the quarter and first half.

Thanks, Richard. Second quarter sales reached $407 million, up 2%, resulting from a positive contribution from the acquisition of 2.7% and an internal decrease of 0.7%. In Canada, sales amounted to $276 million, down 1.1%, of which 2.8% from internal decrease, partially offset by a 1.7% positive contribution from acquisitions. Sales to manufacturers reached $232 million, up 0.9%. And for the hardware retailers, sales stood at $44 million, down 10.6%. In the U.S., sales grew to $150 million in U.S. dollar, up 6.1%. Sales to manufacturers reached $143 million in U.S. dollar, up 8.7%. In hardware retailers and renovation superstores market, sales reached $7.4 million, down 2.9 million. In Canadian dollars, total sales in the U.S. reached 205 million, an increase of 6.5%. For the first half, sales reached 888 million, up 1.5%, of which 0.5% from internal decrease, offset by 2% from acquisition. In Canada, sales reached 508 million, slightly down by 2.1 million, or 0.4%, of which 2.2% from internal decrease and 1.8% from acquisition. Sales to manufacturers reached $420 million, up $4.3 million or 1%. Sales to hardware retailers and renovation superstores reached $88.2 million, compared to $94.6 million, down 6.8%. In the U.S., sales amounted to $280 million in U.S. dollars, up 4%, of which 1.7% from internal growth and 2.3% from acquisitions. They reached $380 million in Canadian dollars, up 4.2%, accounting for 43% of total sales. Sales to manufacturers totaled $264 million U.S., an increase of $13.5 million, or 5.4%, of which 2.9% from internal growth and 2.5% from acquisitions. Sales to hardware retailers and renovation superstores were down 14% compared to last year. Second quarter EBITDA reached 53.8 million, down 7.7 million, or 12.6% over last year. Growth in EBITDA margins continued to be under pressure due to temporary factors, including inventories at higher than current purchasing costs, lower selling price for certain products originating mainly from Asia, plus the temporary impact resulting from the expansion projects. Consequently, EBITDA margins stood at 11.2% compared to 13% last year. First half EBITDA reached 94.2 million, down 14.8%. As for the EBITDA margin, it stood at 10.6% compared to 12.6 last year. Second quarter net earnings attributable to shareholders totaled 23.4 million, down 23.7%, mainly due to amortization resulting from new business acquisitions and expansion projects. Net earnings per share were 42 cents compared to 55 cents last year, a decrease of 23.6%. First-half net earnings attributable to shareholders reached $38.7 million, down 27.2%. Diluted net earnings per share stood at $0.69 compared to $0.95 last year. Cash flows from operating activities before net change in non-cash working capital balances was $45.1 million compared to $50.8 last year. Net change in non-cash working capital items generated a cash inflow of $10.7 million. Inventories continued to reduce as planned, with a positive effect of $22 million this quarter. As a result, operating activities provided a cash inflow of $55.7 million in the quarter compared to a cash inflow of $74.4 million in 2023. For the first half, cash flows from operating activities represented a cash inflow of $56.2 million compared to a cash inflow of $93.2 million last year. For the second quarter, financing activities used cash flow of $38.6 million compared to $17.8 million last year. During the quarter, the corporation paid lease obligation of $10 million, distributed dividends of $8.4 million, and paid interest on bank overdraft of $700,000. During the quarter, we also repurchased $481,000 common share for $18.6 million. First half financing activities used cash flow of $57.6 million compared to $39.8 in 2023. During the first half, we invested $36.2 million, $17 million for the three-business acquisition, and $19.2 million primarily for investments related to the consolidation of our new Calgary warehouse and the purchase of equipment to maintain and improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of $616 million for a current ratio of 3.3 to 1 and almost no debt. I now turn it over to Richard.

Thank you, Antoine. First, I'd like to say something about the situation in our Montreal warehouse. Well, last month, some 125 employees whose collective agreement expired last December went on strike. We have taken appropriate measures to ensure that all our local customers continue to be served thanks to the contingency plan we have put in place. It has to be noted that the strike affected just one of our 114 distribution centers and a small portion of our 3,000 employees. We are confident that a mutually beneficial agreement will be reached very soon. To conclude, we continue to focus on the development of our expanded and modernized distribution centers in the U.S., as well as our new Calgary location, which enables us to effectively support growth of our manufacturer's market, in addition to centralizing the distribution of all products for retailers in Western Canada. We will pursue our projects undertaken in the second quarter regarding the consolidation of our distribution activities for retailers in Ontario and eastern Canada. We are well positioned to seize new opportunities in the renovation market and to benefit from the expected increase in demand in the context of the housing shortage in Canada and in the U.S. Our focus is on profitable growth. This means keeping tight control over our costs and pursuing our winning strategies of innovation, service, and acquisition. Thanks, everyone. We'll now be happy to answer your questions.

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

Hi. Good afternoon. Richard, are you able to share how your year-over-year sales are tracking in Q3 to date for both manufacturers and retailers? Yes, let me get my report.

I have that not very far from me. Regarding the kitchen cabinet market, we're flat compared to last year, which is a positive sign. Kitchen cabinet manufacturers represent about 40% of our sales. Interesting to mention that the commercial innovation which consists of the mid-work and commercial projects is increasing in total by 4.3%, including 6% in the US. That's very positive. Other specialized market that is including what we call the closet market here, we're up by 5% all over North America. It's pretty positive. And we see the downside, though, on the door-and-window manufacturers, which is typically related to the new construction, and the residential and office furniture that are down for many reasons that we know about. The office furniture may be because of the people working from home. So basically, these are positive signs that our manufacturers' market is behaving quite well. The retailers, as a matter of fact, remains down, but we expect this market to improve. because of the many projects that we have undertaken with many of our retail customers. We have new products that came out in the Home Depot stores in Canada three months ago. We have a new project with Home Depot that will be delivered next fall, October, November. Many new projects with Rona. Now that Rona, you know that they have a new executive that has taken place, a new president, a new vice president. So, basically, their mandate is to revive that company that has been, I would say, sleeping for a few years because of what you knew that those wanted to sell its operation in Canada. So, basically, we have many positive signs that give us a clear demonstration that the future looks great with the retailers in Canada. In the U.S., unfortunately, our sales are down because we have lost one customer, but we are in the process of compensating those sales, those lost sales with new customers. What happened with the customers I'm talking about is because they have decided to buy their own products overseas. That's their choice. We don't think it's a good choice, but this is what they have decided. But we think before the end of the year, we should have recaptured that business with other customers.

And, Amir, that's pretty much what we're seeing since the beginning of Q3 as well. So the trend is pretty similar so far.

Okay, thanks, Antoine. And Richard, that customer you mentioned that you lost in the U.S., that was a retailer customer? Yes, a retailer customer, yes. I was talking about the retail market, yes. Perfect. And all the figures that you ran through, I appreciate all that. Was that organic or is that kind of a figure?

Organic only, organic only, not including any acquisition.

Okay. No, that's very helpful. And then, Richard, just turning to, you know, in Q2, you had a 0.7% organic decline, how much of that was weaker volumes and how much was maybe some price deflation? Because I know you highlighted pricing on products from Asia were down a bit.

I will let Antoine try.

Yeah, if you go a bit more in detail, if you look at the reduction in the In the retail business in Canada, it's pretty much coming all of it from price reduction. The rest, we have some price reduction in the industrial business, but not necessarily material. But the one big ticket item regarding price reduction hits the retail business in Canada, and it's pretty much all coming from there.

And mainly for the product that we are importing from Asia.

Okay, so the volumes were pretty stable year over year?

Yeah, in quantity of products sold, it's stable.

Okay. And then, Richard, as you look out over the next 18 months, I know Asia is a small piece of your product mix, but are you seeing any signs of perhaps upward price momentum? Because I think for most of your products, there hasn't been any price increases for some time.

You're absolutely right. And our operating costs continue to increase. The salary continues to increase as well as the price of the rents, the leases that we have to – that we have to pay. I feel that the market will start to increase its pricing. The product from Europe and from America should start to increase. We've seen that with the finishing products, you know, the lacquers and what we call the paint for the wood product that we sell. So we had our first price increase last month and expect that the North American products and European products will start to increase early next year. That's not only a hope. I think these guys also have their operating costs increasing and they're going to have to do something. Asia is still slow. The only problem with Asia is that they have not much to do as we speak. So they don't increase their price, but that could change very quickly.

And Richard, if you see price increases on the Europe and Asia products, are you getting a sign from your suppliers as to this? scale of those increases that they might be looking to realize?

Not yet. I was meeting with an important customer a couple of days ago, which is Bloom, which is a huge supplier. They have a price increase in mind, but they would not put any number on the table as we speak. So basically, I cannot answer clearly that question.

Okay. Fair enough. That's all I had for now. I'll get back in the queue. Thanks.

Ladies and gentlemen, as a reminder, should you have a question, please press star 1. Your next question comes from Zachary Evershed from National Bank Financial. Please go ahead.

Thank you. Congrats on the quarter, everyone. Thank you. Thank you. In terms of the rationalization of the cost base that you guys are entertaining in Eastern Canada and Ontario, Could you give us a breakdown of the cost savings that you're expecting, perhaps by bucket?

Cost savings is important. I will let Antoine answer that question. But I would like to make a few comments regarding the effect on our customers. Because what we are doing, we're centralizing some distribution centers that are mainly servicing the hardware retailers. In the retail market, Richelieu's got something like six different product lines, which, as we speak, are distributed through six different warehouses because these are the results of many acquisitions that we've made in the past. So when we centralize that, what we do for the small customers, because at the retail business, we sell to Rona, for example, to Home Depot, and home hardware and those customers, they buy through their distribution centers, which is easy. It can be shipped from any warehouse. But for the small customers that want to place a purchase order at Richelieu, we have six different products coming from six different warehouses. That means that we have six different prepaid. In order to have their freight for free, they have to buy $500 each of the product line, which is a burden for the small customers. Since we combine everything at the same place, The same prepaid order, $500, applies for all the products. That will create more sales because the customers, they don't have that benefit from our competitors. and it will make their life easier in order to manage their stores, and it will save money, as we will, because while combining those distribution centers, we save on operating costs, and we save on product handling and everything else, because we still use the same sales force. The difference would be in the labor force in the warehouse.

Regarding cost reduction, Zach, we're talking about close to $1.5 million in terms of... Reduction in costs and another 1.5 when we'll be able to exit the location that we're in. So that should be happening before now and the end of the year. So close to 3 million.

Next year. And those are annual numbers, not quarterly, right? Yeah, annual numbers. Perfect. And then would you be able to quantify the dollar impact of the strike in Montreal or would it not be material?

We don't think it would be material. First of all, I said that it would be fixed very shortly. We don't see that should be very detrimental to our sale because the contingency plan is very effective. We have used Mississauga, Ottawa, Quebec, Moncton, and Nova Scotia warehouse in order to continue to serve our customers effectively. The non-unionized people here were working in the warehouse in Montreal. They did a fantastic job. These guys are very efficient. They have learned very fast how to do the job. It was amazing to see the auto store and the conveyors running and getting the boxes out of that warehouse. So we don't expect any huge benefit, but it's still early to evaluate all the impacts. Antoine, what do you think?

No, no, you're correct. We were... We were monitoring the lines shipped all across our network versus what we were shipping before. So we haven't seen major impact. There will be a small impact, of course, that's for sure, but nothing material from our point of view as we speak.

That's helpful. Thanks. And then my line did cut out for a moment, so apologies if this has already been asked, but have your expectations for margin levels for 2024 changed at this point in time?

So as you can see, the second quarter is pretty aligned with the first quarter. The gap between the EBITDA margin last year reduced in the second quarter, so it's going to reduce as well in the third and the fourth quarter. It's going to improve. The second half should be better than the first half, that's for sure. And next year, when we're going to see the market coming back, we should also see an improvement in margin if the market is improving.