Richelieu Hardware Ltd

TSX:RCH

Earnings Call Transcript 2018-Q1

[Operator]

[Foreign Language] Good afternoon. My name is Jessa, and I will be conference operator today. At this time, I would like to welcome everyone to the Richelieu Hardware First Quarter 2018 Results Conference Call. [Operator Instructions] Mr. Richard Lord, President and Chief Executive Officer, you may begin your conference.

[Richard Lord, CEO, President & Executive Director]

Thank you. [Foreign Language] Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the first quarter ended February 28, 2018. With me is Antoine Auclair, CFO. As usual, note that some of today's issue include forward-looking information which is provided with the usual disclaimer as reported in our financial filings.At our Annual General Meeting held this morning, it was a pleasure to highlight the 50th anniversary of Richelieu and the 25th anniversary of its listing on the TSX. We are off to a good start with our first quarter marked by higher result, notably by a strong sales growth in our manufacturers and retailers market both in Canada and the U.S. Thanks to the ongoing contribution from our 2017 acquisitions, our market development and innovation strategies, we are pleased with our performance, especially for our first quarter, which is historically the weakest period of the year.On February 26, we closed the acquisition of Cabinet and Top Supply, a distributor of specialized products based in Fort Myers in Florida, which became our 9th distribution center in this important market. This new acquisition will add annual sales of approximately USD 4 million. As of February 28, our financial position was excellent. And this morning, the Board of Directors approved the payment of a quarterly dividend of $0.06 per share. Now let's look at financial highlights. First quarter sales reached $222 million, up by 13.3%. Of which, 6.2% from internal acquisition and 7.1% from acquisitions. At comparable U.S. exchange rates to 2017, sales growth would have been 15.3%. Sales to manufacturers stood at $183.4 million, up by 11.3%: 2.8% from internal growth and 8.5% from acquisitions. At comparable U.S. exchange rates to 2017, the internal growth would have been 4.8%. In the hardware retailers and in renovation superstores market, we achieved sales of $38.6 million, up by 24%. In Canada, sales amounted to $143.7 million, up by 14.4%. Of which, 5.6% from internal growth and 8.8% from acquisitions. Our sales to manufacturers reached $113.6 million, up by 15.3%. As for the hardware retailers and renovation superstores market, sales stood at $30.2 million, up by 11.4%. This growth is due mainly to market share gains and the addition of new customers.In the U.S., sales totaled USD 62.2 million, up by 17%, 2.7% (sic) [ 12.7% ] from internal growth and 4.3% from acquisitions. They reached CAD 78.3 million, an increase of 11% and represented 35.2% of the total sales. Sales to manufacturers reached USD 56 million, up by 10.6%, 6% from internal growth and 4.5% from acquisitions. In the hardware retailers and renovation superstores market, sales grew by 123% in U.S. dollar. This increase is the result of our market development efforts including significant cyclical sales in the first quarter compared to the corresponding quarter of 2017.First quarter EBITDA reached $19.8 million, up by $1.5 million or 8% over the first quarter of 2017. Gross margin was down from the first quarter of 2017, mainly influenced by lower gross margin of recent acquisitions due to the different product mix as well as an higher level of direct sales made in the first quarter. These factors, combined with the increased costs incurred during the quarter related to market development, the reorganization of certain distribution centers and the implementation of the new technology also affected the EBITDA margin, which stood at 8.9% compared to 9.4%. Amortization expenses for the first quarter of 2018 was up by $0.6 million, resulting mainly from major investment in capital assets and business acquisition made in 2017.First quarter net earnings attributable to shareholders totaled $12.7 million, up by 5.9%. Diluted earnings per share rose to $0.22 compared with $0.20 for the first quarter of 2017, an increase of 10%. First quarter's -- first quarter cash flows from operating activities, before net change in working capital balances, amounted to $16.2 million or $0.28 per share, an increase of 8.3%. During the first 3 months, we paid dividend of $3.5 million, up by 5.4% over 2017 and repurchased 148,000 shares for $4.5 million. We also invested $4.7 million. Of which, $2 million for the business acquisition and $2.7 million to purchase new equipment to improve operational efficiency and IT equipment.As of February 28, 2018, cash totaled $3.2 million and our working capital was $204.4 (sic) [ 304.4 ] million for a current ratio of 4.7:1.Turning to our outlook. Creating synergies through acquisitions and optimizing their potential will remain priorities in the coming quarters. We continue to focus on product information and innovation, market development, operational efficiency and new acquisitions, opportunities in the -- new acquisition opportunities in the North American market. We are confident we will achieve a good performance in upcoming periods. That concludes my overview. Thank you for your interest. We'd now be happy to answer your questions.

[Operator]

[Foreign Language] [Operator Instructions] Your first question comes from the line of Leon Aghazarian from National Bank Financial.

[Leon Aghazarian, Special Situation Analyst]

Just -- can you break down some of the sales by region? I mean, I'm trying to see if -- your Western Canadian versus Quebec, Ontario and then as well as the -- by segment, your kitchen cabinet manufacturers vis-à-vis the residential, et cetera?

[Richard Lord, CEO, President & Executive Director]

Yes, Leon. In the Eastern Canada, our sales increased by 3.7%. In Ontario, sales increased by 7.6%. There, I can give you the details. The industrial sales were up by 6.5 -- 6 -- I mean, sales to manufacturers were up by 6.5% while the sales to hardware retailers were 10.5%. Western Canada sales were up by 6.7%, which is composed of 2.5% for the manufacturers and 26% for the retailers. So as a total, in Canada, kitchen cabinet manufacturers sales increased by 4%; the commercial woodworking business increased by 6%; residential furniture increased by 8%; office furniture by 1.5%, let's say, that goes together with the account of 10% in the increase; and the retailers, as you already know, increased by 11%.

[Leon Aghazarian, Special Situation Analyst]

It seems to be pretty balanced throughout -- either the -- whether it's the country and whether it's by segment. I mean, it's fairly evenly spread out, I guess. I guess, my question is like what's the main reason for that? I mean, what's the competitive landscape looking like? Is that affecting in any way how you're seeing the business out there?

[Richard Lord, CEO, President & Executive Director]

The business out there regarding the manufacturers seems to -- it's real. I would say it's okay in Ontario and Eastern Canada. And Western Canada, we see that we still have an increase for the manufacturer at 2.5%, which is I think it's a -- it's very interesting considering the circumstances and how our retailers are, for the time being, is a booming market for us.

[Leon Aghazarian, Special Situation Analyst]

On the press release, you highlighted the winning of new customers and market share gains in Canadian retailers. And what's been driving that? Is it new business? Can you talk to us a little bit more in detail as to what kind of market share gains type that is?

[Richard Lord, CEO, President & Executive Director]

We continuously year-after-year made good investment in order to improve our sales to hardware retailers. We have gained the lowest business across Canada last year, and we have gained many other customers in other market segment like our builders hardware or decorative hardware. So many new customers as well in Western Canada. Independent retailers are now with us that used to be with our U.S. competitors. So basically, we did a very good job both in terms of displaying the products and selling the products to those customers by convincing them that they're going do -- they're going to make more money selling our products than the products of anybody else.

[Leon Aghazarian, Special Situation Analyst]

Are you seeing any difference with what you're seeing at the U.S. retailer level? I mean, you published a pretty strong number in terms of U.S. retailer. Can you maybe talk to us a little bit about that?

[Richard Lord, CEO, President & Executive Director]

Yes. Yes. The number are very, very strong in the U.S. Again, most of the sales that -- the increase of sales is due to direct sales and cyclical sales, which is higher than usual, much higher than usual. So it's good news for us. But it's also the result of additional customers. And fortunately, with those cyclical sales, those helped the quarter. And in the future, we -- actually, we see a gain -- we'd gain probably another probably $3 million that's going to come later on during the year to hardware retailers in the U.S. And new customers like to -- hardware like the mills and farm supplies and we -- what's the other one?

[Antoine Auclair, VP & CFO]

The Saint-Laurent.

[Richard Lord, CEO, President & Executive Director]

Saint-Laurent. Those are not very well-known name here in Canada. But in Canada, mills and Saint-Laurent, they each have a [ 100 ] sourced. So basically, for us, it's the type of development that we like. It's not a huge amount of business, but it's a -- it also spread our risk in this market. So basically, we are quite happy to have gained those new customers. And we're going to start building them, some in the third quarter and some in the fourth quarter of this year.

[Leon Aghazarian, Special Situation Analyst]

There's been -- you had some -- I guess, what you call an -- initiatives where you've been spending some cash in terms of automating certain factor -- certain distribution centers, pardon me, in the U.S. I mean, could you just talk to us a little about some of those near-term pressure? Like how long should we expect some of those costs to be in, in the year? I'm just trying to look ahead to see what we should be looking for in terms of margins.

[Richard Lord, CEO, President & Executive Director]

Yes. We're in the process of installing an auto store here in Ville Saint-Laurent. It's an investment. The value of the equipment is about $6 million. I guess, the installation of one would be something like a couple of million dollar. So I would say that you still have -- we still have at least a quarter to go with more expenses because -- actually, things are doing fine. I had visited the warehouse last week with that one and we -- there, things are really smooth actually. The system is functioning very well. What we're left with actually is the reorganization of the space that we have sales because of that new machinery. Now we have to be organized in part of that warehouse. So I guess, we're going to have those expenses here finish at the end of the second quarter. So we should be back in normal at that time.

[Leon Aghazarian, Special Situation Analyst]

Okay. I appreciate that. And one final one, I guess. We did see a very small tuck-in in Florida as it pertains to some more M&A. I mean, what's your pipeline looking like? Any change to what you've been seeing recently in terms of, I guess, pricing or more opportunities that way?

[Richard Lord, CEO, President & Executive Director]

If we -- this thing -- fairly, that is interesting because actually, we really are very well positioned. With 9 distribution centers in Florida, our market share will increase. Actually, I'm very happy with how things are going in Chicago and the other area of the U.S. actually where we have -- we see that things are taking shape in terms of additional manufacturer and increased sale as well. Regarding the opportunities for acquisitions, maybe, Antoine, you can add -- you have more details you can add to that.

[Antoine Auclair, VP & CFO]

Yes. Leon, the pipeline is still very healthy either in Canada or in the U.S. So we have a few files opened. And it's pretty much standard pipeline. So yes, we still have nice opportunities in front of us.

[Leon Aghazarian, Special Situation Analyst]

Are they all a tuck-in variety of these types of size? Or are you seeing any other opportunities like larger ones essentially in the U.S?

[Richard Lord, CEO, President & Executive Director]

It's between, I would say, $3 million and $10 million. This is what we have in hand, actually.

[Operator]

[Foreign Language] [Operator Instructions] Your next question comes from the line of Jose Desjardins from BMO Nesbitt Burns.

[Jose Desjardins]

I'm very happy to be a shareholder of a -- Richelieu. And I have just a little question regarding the recent behavior of the share on the market. We've seen a dip like close to 14%, and this is the largest dip since we have been shareholders of the company. And we see positive results, positive growth, nice margins. But our clients are like saying a bit, "What's going on? Is it the U.S.? What's going on with Mr. Trump?" Or is it maybe the conditions with the hardware that you are dealing with like Home Depot or other people like that? So how would you comfort your investors saying that maybe it's a buying opportunity at the current level, around $29 when we come from $35?

[Richard Lord, CEO, President & Executive Director]

The best way to comfort investors is to make the key demonstration to you guys that we are doing our job. We have the growth, we continue to invest and we -- and that -- those investment results in the fabulous sales increase. So that's the way that we have to walk when we're in charge of a company. So obviously, to generate the growth to smart investment. Regarding the price of the share, unfortunately, we don't have any control of that. That's up to the people that own their share that decide to sell for whatever reason. Some read the papers and they get scared because the stock exchange is going down. Some are making posit because they are losing some money somewhere else. I kind of had many arguments like that, but my job is not to argument on the price of the share, but to convince you that we can continue to drive this company in the right direction and bring the results that you -- used to see.

[Jose Desjardins]

Okay. So you still have a buyback program in place for a...

[Richard Lord, CEO, President & Executive Director]

Yes. Yes, sure.

[Jose Desjardins]

Okay. So I thought maybe with the buyback program, the stock would hold a bit higher. But I'm comfortable with your answer, and we believe in your company, and thank you for keeping up the good work in the industry.

[Richard Lord, CEO, President & Executive Director]

Thank you very much. Thanks.

[Operator]

Your next question comes from the line of Scott Carscallen from Mackenzie Investment.

[Scott Carscallen, Portfolio Manager]

I just wanted to expand a little bit further on the margin question. You touched on some of the additional expenses that you were putting in place for, I guess, new technology in the warehouses. Looking back to your last quarterly conference call, the fourth quarter conference call, you mentioned a couple of things. One, that you were planning to announce some price increases in the second quarter and third quarter. And you also said you expected to see 2018 margins getting back to hit the historical levels. Are those 2 items still relevant -- still the case?

[Richard Lord, CEO, President & Executive Director]

Regarding the gross margin, yes. The price increase for the retailers will take place -- it's taking place somewhere in March -- April 1, I think is the date. So we're going to start to see the result -- a part of the result in the second quarter and the rest in the third quarter. This is why we also have a big increase in our sales for the retailer market in Canada. It's because the -- we have announced the price increase for the end of March or beginning of April. So in the first quarter, they are readily placed. The -- in some orders, they have increased their inventory because they wanted to benefit from the price before the increase. So that's one of the reason why the sales increase so much. But regarding the gross margin as well, we have those cyclical sales, I mean, some direct sales. In the retailers in that type of market, you have to do some what we call here the yearly bookings. For example, the retailers, they buy their screws at this time of the year. And sometime for this year, we sell more than ever for whatever reason, maybe our price is too low, I don't know. But we see our margin as being -- is not -- just not low in the circumstances. But that does affect our gross margin. But it does not say much about the EBITDA because those are the results of direct sales. But what else could we add to that? Antoine, what did I forget to mention?

[Antoine Auclair, VP & CFO]

But for sure, Scott, by adding acquisition like we've concluded with Weston, this will have an effect on the gross margin because it's a product, I think, really that brings lower gross margin. So that can also dilute the percentage of margin.

[Scott Carscallen, Portfolio Manager]

Right. The Florida acquisition, are you able to say if their margins are comparable to Richelieu's? Or are they lower?

[Richard Lord, CEO, President & Executive Director]

No. No. They're comparable to the other as we see. As we have in the U.S., lower. But that's the name of the game.

[Operator]

[Foreign Language] There are no further questions at this time. Mr. Lord, I turn the call back over to you.

[Richard Lord, CEO, President & Executive Director]

There's no -- if there's no more question, thank you very much for attending this call. And we're always pleased to talk to you if you have more question. Bye-bye.

[Operator]

[Foreign Language] This concludes today's conference call. You may now disconnect.