Richelieu Hardware Ltd.

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richard Hughes' conference call for the third quarter and first nine months ended August 31, 2024. 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 filings. Overall, we had a good third quarter where we achieved sales growth and maintained a healthy and solid financial position, considering the soft demand in the R&R and the new housing market. Total sales growth per quarter reached 1.9%, partially fueled by our strong performance in the U.S. manufacturer's market, where sales increased by 7.5% in U.S. dollar, driven by the significant impact of our acquisitions. As for the retailer and innovation superstore market, We continue to see lower sales compared to last year, mainly due to the price deflation and lower demand in this market. Our margins continue to be under pressure from temporary factors, as it was the case in previous quarters. Notably, the charge of inventory purchased at higher than current costs, lower selling prices for certain products, and operating expenses related to our expansion projects. During the quarter, we pursued our network optimization initiative by consolidating two of our centers in the New York area and on the west coast of Florida. And now, a little word to Antoine for the financial review of the quarter.

Thanks, Richard. In the third quarter, sales reached $407 million, up 1.9%. This growth was driven by a positive contribution from acquisition of 3.2%, partially offset by an internal decrease of 1.3%. In Canada, sales totaled $265 million, down 2%. This decline was mainly due to a 3.5% internal decrease, partially offset by a 1.5% positive contribution from acquisitions. Sales to manufacturers amounted to $222 million, up 0.5%, while sales to hardware retailers stood at $43 million, down 13.4%. In the U.S., sales grew to $148 million in U.S. dollars, up 4.8%. Sales to manufacturers reached $141 million, up 7.5%. In the hardware retailers and renovation superstore market, sales reached $7.1 million, down 3.1 million. In Canadian dollar, total sales in the U.S. reached $203 million, an increase of 7.5%. For the first nine months, total sales reached $1.4 billion, up 1.6%, of which 0.8% resulted from internal decrease, offset by 2.4% contribution from acquisitions. In Canada, sales reached $773 million, slightly down by 1%. This was driven by a 2.7% internal decrease, partially offset by 1.7% contribution from acquisitions. Sales to manufacturers totaled 642 million, up 5.3 million, or 0.8%. Sales to hardware retailers and renovation superstores were 131 million, compared to 143.9 million, down 9%. In the U.S., sales amounted to 429 million in U.S. dollar, up 4.3%, with 0.9% attributable to internal growth and 3.4% from acquisitions. They reached $583 million in Canadian dollar, up 5.3%, accounting for 43% of total sales. In US dollar, sales to manufacturers totaled $405 million, an increase of $23.4 million, or 6.1%, driven by 2.5% internal growth and 3.6% from acquisitions. Sales to hardware retailers and renovation to first stores were down 19.7% compared to last year. Third quarter EBITDA reached 53 million, down 8 million or 13.2% over last year. Growth and EBITDA margin remain under pressure due to temporary factors, including inventories at higher than current purchasing costs, lower selling prices for certain products primarily sourced from Asia, and the temporary impacts of consolidation and expansion initiatives. Consequently, the EBITDA margin stood at 11.3% compared to 13.3 last year. For the first nine months, EBITDA totaled 147.2 million, down 14.2%, with the EBITDA margin at 10.9% compared to 12.9 last year. Net earnings attributable to shareholders In the third quarter, it amounted to $22.7 million, down 23.9%, mainly due to amortization associated with new business acquisitions and expansion projects. Net earnings per share were $0.41 compared to 53 last year, a decrease of 22.6%. For the first nine months, net earnings attributable to shareholders reached $61.4 million, down 26%. Diluted net earnings per share stood at $1.9 compared to $1.47 last year. Cash flow from operating activities before net change in non-cash working capital were $42.7 million compared to $49.8 million last year. The net change in non-cash working cap items generated cash flow of $7.5 million. As a result, operating activities provided a cash inflow of $50.2 million in the quarter compared to a cash inflow of $104.8 million in 2023. For the first nine months, cash flows from operating activities represented a cash inflow of $106.4 million compared to a cash inflow of $198 million last year. For the third quarter, financing activities used cash flows of $18.4 million compared to $18.2 million last year. During the quarter, we paid lease obligation of $10.5 million and distributed dividends of $8.4 million. For the first nine months, financing activities used cash flow of $76.1 million compared to $58 in 2023, with the variance primarily attributable to common share repurchase amounted to $18.6 million this year compared to $800,000 last year. In the first nine months, we invested $42.4 million in including $17.6 million for three-business acquisition and $25.4 million primarily for investment related to our consolidation and expansion projects, including our new Calgary location and the purchase of equipment to maintain and improve operational efficiency. We continue to maintain a solid financial position with working capital of $632 million and a current ratio of 3.5 to 1, while holding almost no debt. I now turn it over to Richard.

Thank you, Antoine. We are pursuing our acquisition strategy as we sign agreement in principle in the third quarter in view of four new acquisitions, two in Canada and two in the U.S. We feel confident about achieving good future performances, considering that the current housing shortage in North America is offering a great potential of growth for the future, and that the R&R market is expected to recover in the coming months. We are committed to seize this opportunity. We benefit from a strong positioning with a robust network, unmatched offering, expert team, outstanding website, a distinctive service appreciated by customers in our diversified segments. And we have a solid innovative drive in all the growth sector of residential and commercial innovation. Thanks, everyone. We'll now be happy to answer your questions.

Thank you. Merci. Ladies and gentlemen, if you are an analyst and would like to ask a question, you will have to press star followed by 1 on your touch-tone phone. You will then hear a prompt that your hand has been raised. And if you would like to decline from the polling process, please press star followed by 2. And if you're using your speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead, press star 1 now if you have any questions. And your first question will be from Herme Patel at CIBC Capital Markets. Please go ahead.

Hi. Good afternoon. Richard, if you're successful in completing those four acquisitions, would you expect that to be completed in the fourth fiscal quarter? And what would be the total revenues associated with the four deals?

Yes, it would be – It will be settled before the end of the third quarter, Antoine, just to have a precise number?

Yeah, before the end of the fourth quarter or slightly after that, but definitely in 2024. And we're talking about adding $40 million to the $60 million that we've already completed at the beginning of the year.

Okay, great. Thanks, Antoine. And would that be largely on the manufacturer's side? Yes. Okay. Yeah. And then, Richard, are you able to give an indication of how sales fared in the month of September?

Yeah, in the month of September, as we already have discussed in our last meetings in Montreal, basically the month of September has been in the same trend that we've seen in the past. And we see the trend, for example, with the construction of this manufacturer to be a slight increase in this market. The commercial woodworking industry is doing well with an increase of 6%. And we have other specialized markets, which is anything else, an increase of 1%. And all the other markets have a slight decrease of something like 2.5% to 3%. So basically, we don't see any sign of recovery yet, but we're certain that in the coming months, the market will certainly improve. And Richelieu is now working with its team to make the budget for the next year. And many of our people are optimistic. are very positive about what will happen in the market. We just hope that this thing will materialize. But there is no doubt in our mind the market will have to improve. The question is only when.

Okay, fair enough. And, Richard, I know the margins kind of troughed in Q1, yet an improvement in Q2 and Q3. How do we think about just given it sounds like near-term things are still a bit sluggish, would you expect any margin improvement in Q4? and how do you think about maybe where full-year margins could go in 2025?

Yeah, it's not one slight improvement. To change the margin materially, we would need to see a recovery in the market. So we're in distribution. So top line addition in sales goes down the bottom line very quickly. Same thing if there's a reduction in sales, but In a better market, you will see the margin improving. If not, there are a few things we're doing, like improving our expansion projects and those projects we have ongoing. So this will improve the EBITDA, but not materially if the market does not recover.

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

Thanks. Thank you. Next question will be from Zachary Evershed at National Bank Financial. Please go ahead.

Good afternoon, everyone, and thanks for taking my questions. How consistently do you think you can add $100 million in run rate revenue through acquisitions? Do you think that's an average target or an annual minimum going forward?

It's just an average target, David. So we have to – the plan that we have, this is what we'd like to achieve. If one year we make only $50 million, the next year we're going to have to make $150 million. So basically average for the next five years should be around $100 million, which is quite possible. And we see the portfolio of potential equation that we have in our hands. As we speak, we just said that we have an argument in principle for four – But there are others coming soon as well. The timing seems to be pretty good.

Good color. Thanks. And then the U.S. customer lost in Q2. How's it going on backfilling those volumes?

Well, we're getting some sales from other customers. Just to explain, that was Lowe's. We were supplying them with injuries on slide with the Richard Hughes and Bloom name, for example. We have decided to have their own brand names importing from China. I don't think it's a good move for them because the people, when they replace the engines or slide into the kitchen cabinet, it's already printed blue onto the slide because we, both together, I think we have something like 80% of the market. But that's their decision. We have to respect that and we have to find sales with other customers, which we're doing with customers like tractor supply, for example, that we have a good commitment from them and we're going to see our sales increasing for the next, in the next quarter as well. Basically, we should get that business back from other customers, and we have to sell more to the retail market in the U.S. We have to refine our plan. We would like to make an acquisition in this market as well. Eventually, that will happen.

Understood. Thanks. And on the topic of Bloom, you mentioned that they were pushing for a price hike last quarter. How well is that flowing through so far, and are you seeing other suppliers start to follow suit?

No, we don't see that, but that's going to happen because the suppliers that are not from Asia, they have to increase their cost by, you know, the rent are increasing, the salary increasing. So basically, I think this is obvious that eventually all these suppliers, the North American, the European suppliers, will have to increase their price again. And that does not apply to Asia, though, because Asia, we thought we – The communication that we have with our suppliers in Asia is that they don't have much to do, so they're quite willing. They give us better price, though, so we improve the margin for the future, but they don't have much to do, so we don't see that they will increase their price shortly.

Understood. Thanks. Then just a last one from me. When do you think we start to get out from under the modernization and expansion costs?

I would say early next year.

That's it for me. Thanks. I'll turn it over.

Thank you. Once again, ladies and gentlemen, if you are now on the list and would like to ask a question, please press star followed by one. And at this time, Mr. Law, we have no other questions registered. Please proceed.

Okay. Thanks, everyone. I would be happy to answer your question.

We have no other questions at this time, sir.

Sorry, no, that's fine. And thanks a lot for attending. And if you have any questions, you can give us a call.

I received a phone call. So I had to answer immediately. It took 10 seconds, but the timing was not good for you. So I apologize.

Thank you, gentlemen. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.