Richelieu Hardware Ltd

TSX:RCH

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware First Quarter Results Conference Call. [Operator Instructions]

Also note that the call is being recorded on April 7, 2022. [Foreign Language]

[Richard Lord, executive]

[Foreign Language] Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the first quarter ended February 28, 2022. With me is Antoine Auclair, CFO. Richelieu started 2022 on a very positive track as shown by the organic growth and expansion through acquisitions in the first quarter. The financial performance of the quarter is all the more significant since the first 3 months of the year are historically our weakest. Driven by our strong network of interconnected center, our innovation and value-added service strategies, the input of our acquisition and our market penetration initiatives, we have seen the opportunities of our diversified market. Our results are quite satisfactory, with an increase of 29.2% in sales from solid internal growth and a substantial contribution from acquisition, an increase of 40.8% in EBITDA and 43.2% in net earnings per share.

I would like to point out that our sales in the U.S. now represent 40% of our total sales. We ended the first period with a sound financial position and an average return on equity of 24%. As for the expansion achieved in the quarter, following the further acquisition completed in Canada and the U.S. in fiscal 2021, on December 31, we completed 3 additional acquisitions in the U.S. As previously announced, I would recall that the 3 acquisitions of Compi Distributors in Illinois and Missouri; HGH Hardware Supply in Alabama, Tennessee and Georgia; and National Builders Hardware in Oregon, and a combined one of them -- had a combined $100 million in sales on an annual basis. With the 5 previously completed in 2021, $180 million in yearly sales are added along with access to new deliveries, new customers and teams that know their respective markets very well.

I will now turn it over to Antoine for a review of the results and the financial situation for the quarter.

[Antoine Auclair, executive]

Thanks, Richard. First quarter sales reached $384.5 million, up by 29.2%, of which 16.3% from internal growth and 12.9% from acquisitions. Sales to manufacturers stood at $326.7 million, up by 35.2%, of which 21.8% from internal growth and 13.4% from acquisitions. In hardware retailers and renovation superstores market, we achieved sales of $57.8 million, up $1.9 million or 3.4% due to acquisition and despite a 7.6% internal decrease over sales in the first quarter 2021, which were up 34.5%. In Canada, sales amounted to $230.5 million, up by 19.3%, of which 13.2% from internal growth and 6.1% from acquisitions. Our sales to manufacturers reached $186.7 million, up by 21.9%, of which 17.7% from internal growth and 4.2% from acquisitions. As for the hardware retailers and renovation superstores market, sales stood at $43.8 million, up 9.5%, of which 13.8% from acquisition and 4.3% of internal decrease. In the U.S., sales grew to USD 121.2 million, up 48%, 22.5% from internal growth and 25.5% from acquisitions. They reached CAD 154 million, an increase of 48% and represented 40% of total sales.

Sales to manufacturers reached USD 110 million, up by 58.8%, 29.3% from internal growth and 29.5% from acquisitions. In the hardware retailers and renovation superstores market, sales were down 12% from the corresponding quarter of 2021, which were up 32%. First quarter EBITDA reached $53.7 million, up $15.6 million or 40.8% over the first quarter of 2021. The gross margin was slightly better and the EBITDA margin improved to 14% compared to 12.8% last year due to the increase in sales and continued control of expenses.

First quarter net earnings attributable to shareholders totaled $30.1 million, up 43.4%. Diluted net earnings per share rose to $0.53 compared with $0.37 last year, an increase of 43.2%. First quarter cash flow from operating activities before net change in working capital balances amounted to $42.6 million or $0.75 per share, an increase of 38.5%. Net change in noncash working capital balances used cash flow of $80 million, mainly due to investment in inventory as a result of the increased demand and, to a lesser extent, to the higher cost of some products. We paid dividends of $7.3 million to shareholders, and we invested $46.2 million, including $42.4 million for 3 business acquisitions and $3.8 million in CapEx.

I now turn it over to Richard.

[Richard Lord, executive]

Thank you, Antoine. In the coming quarters, we will pursue the integration of our 8 recent acquisitions. To better serve our market and respond to demand, we will continue to expand our U.S. network in addition to the 2021 expansion in Detroit, Reading, Boston, Orlando, Dallas and Rochester regions. We will finalize the expansion of our Fort Myers, Atlanta and Chicago centers. We are keeping our focus on our value-added multi-access service, and our main growth driver, which are our innovation and acquisition strategies and market penetration in Canada and the U.S. Richelieu will always remain customer, innovation and result oriented.

Thanks, everyone, and I will be happy to answer your questions.

[Operator]

[Operator Instructions] And your first question will be from Meaghen Annett at TD.

[Meaghen Annett, analyst]

First question on the EBITDA margin in the quarter. Understanding that Q1 is a seasonally weaker period, is there anything to note that pressured the margin in the quarter? And would you expect to remain above the 13.5% to 14% level in the near term?

[Antoine Auclair, executive]

Yes. It's Antoine speaking. The answer to your question is, yes, we expect it to remain over the thresholds you just mentioned, and there's nothing specific. It's really important to understand that the EBITDA margin in Q1 is historically the lowest one. So the Q1 is a softer period compared to the next period. So historically, it's always been the case.

[Meaghen Annett, analyst]

And in terms of what you're hearing from your customers on the residential side, are customers noting any weakness in light of the current macro environment? Are you seeing any change in their tone given the rising interest rate environment and perhaps, inflationary headwinds? And if you could also just talk to your exposure in institutional markets and any trends you're seeing from customers servicing those end markets as well.

[Richard Lord, executive]

All the market that we are servicing, whether it is residential or commercial, I think that our customers are still quite busy. We -- while consulting our salespeople, they keep saying us that the customers are probably busy until the end of the year, at least. We never know about 2023, it's too early. But we have -- we're learning though that the shipping period has been shortened. The shipping a kitchen cabinet 3 months ago would take 8 months. Now the delay would be 5 to -- 4 to 5 months. It means that it's improving, but also there are many projects that have been postponed as well that will be coming back to the market. Regarding the commercial, those things that remain very strong because of the infrastructure for the government, whatever. It is schools, whatever. The governments and institutions, they have a huge budget actually for infrastructure, which generates some pretty good business. And we're also expanding in various markets like the closet, in which our sales increase something like 40% so far still this year.

And the RV market, that's a new market for us. We have the good surprise to see that our sales growth in this market are very, very interesting, and we continue to grow in the future. We even have added a new sales force just to cover the RV market in the U.S. because this is a huge market, and this is market that is presently very, very busy. So basically, we expect the trend to continue on for the rest of the year, but we never know about 2023. But we're optimistic because many projects has been postponed. I think the COVID is not 100% finished. So people will be traveling probably less and go less to the restaurant as well. So they will probably undertake other projects, the closet, the kitchen cabinets, the bathroom while the commercial will remain to be strong in the future as well. That's about what I could say -- what I could comment about the situation.

[Meaghen Annett, analyst]

Great. And then the last question for you, Richard. You have mentioned previously that annual sales of $2 billion would be achievable for the business. Can you put some context around that commentary, including when you see that being achieved? And also the drivers behind it in terms of organic growth and acquisitions?

[Richard Lord, executive]

We already have reached $1.4 million. We see this to forecast the growth of this year, and it's easy to see where we're going to be at the end of 2022. And let's say that 2023 is also a decent year with a growth, let's say, like 10%, including acquisition and everything else, that's going to be really close to $2 billion. And in the U.S., actually, I think our team in the U.S. is on fire. Because the target -- it's a target among us between us here is to reach $1 billion only in the U.S. That's optimistic for the short term, but we have reached an important stepping stone this month, this quarter because we have reached 40% of our sales now, 40% of our total sales are in the U.S., and the goal has always been to be at least at 50%. So we're getting close. Last year, we were something like a 35%, Antoine, if I remember well.

[Antoine Auclair, executive]

Yes.

[Richard Lord, executive]

So if we can keep up with that 40%, that's very encouraging. And I can tell you one thing, our team in the U.S. is on fire.

[Operator]

Next question will be from Hamir Patel at CIBC Capital Markets.

[Hamir Patel, analyst]

Richard, could you give us a sense as to how you're -- your sales in the month of March fared for both manufacturers and retailers?

[Richard Lord, executive]

We're in the same trend as we were in the first quarter so far, and it seems to be continuing on like that, and we expect that to continue at least for the present quarter.

[Hamir Patel, analyst]

Okay. Great. That's helpful. And Richard, you pointed a pretty positive picture across your various end markets. I'm sure you've seen some of the reports of disappointing R&R demand, at least for wood products. I was curious, do you think perhaps that's more a story of weakness in the DIY category where you have less exposure? Or is it potentially a sign of weakness ahead for your own business, just given that maybe the wood products are installed earlier in a rental process than your categories are?

[Richard Lord, executive]

Regarding the price of the wood, if you look at the residential market, I was speaking with contractors last month, and they were saying me that the building material, including wood, the wood is about 20% of our house, while the building materials in general are 50%, including the wood, and the labor is 50%. So basically, the cost for our house and the renovation is still not that bad, but regarding the retailers market, I think the market is just back to where it should have been like it was before the pandemic.

So far, this is what we see. And we -- if you remember that year, we had 2 strong first quarter and 2 weak last quarter. So I guess it's going to be really difficult to reach the level of last year for the present quarter -- I mean the second quarter. And for the 2 last quarters, we should do better than last year because we see -- we look at the sales. Sales are normal, actually. We have as much as -- in fact it does include some inflation, but we have an increase. We will have a slight increase in the second quarter, including the acquisitions, and in the second quarter that should be much better. I don't know if I can answer well your question, but this is what I understood.

[Hamir Patel, analyst]

Okay. No, that's helpful. And just last question for me. Richard, just given the growing concerns, especially in the U.S., about rising mortgage rates and what that could mean for housing, are you seeing signs of some of the acquisition targets that you had discussions with maybe being more inclined to want to transact this year?

[Richard Lord, executive]

What we have seen actually, I think we've made 3 wonderful acquisition in December 31, 2021. And I think these guys, they have sold their business because they thought probably that they were at the top of what they can reach in terms of results. If the market is cooled down a little bit, are there some other distributors that will decide to sell? Probably, yes. We don't know yet. But for the time being, our pipeline is still interesting, but we need more beef in terms of those acquisitions, like the one that we've made last year, and that should come in the course of the year. But we will look out 100%. We have a team that is dedicated 100% for the acquisitions, and hope that we're going to have a good year for that as well.

[Operator]

[Operator Instructions] And your next question will be from Zachary Evershed at National Bank.

[Zachary Evershed, analyst]

Given the inflation that we're seeing ahead, can you give us an idea of the cadence of 2022 price hikes that you're planning?

[Antoine Auclair, executive]

Yes. We're talking -- if you look at the first quarter, we're talking somewhere around 12%. And as you know, Zach, we are a very, very flexible pricing system. So as -- if we see increases in product costs, we're going to be adjusting prices. So that's what we've always been doing.

[Zachary Evershed, analyst]

But at this point in time, not really any further price hikes in the pipeline?

[Antoine Auclair, executive]

As we speak, nothing in the pipeline, but if we need to, we'll do it.

[Zachary Evershed, analyst]

Understood. And then on the sourcing front, can you give us an idea of whether you're seeing any improvements in either freight costs or just on general unlocking and logistics?

[Richard Lord, executive]

We don't see any improvement in the freight cost. I think we see that getting worse and worse and worse. And -- but approximately, I guess, you have seen that we have increased our inventory. I think Antoine has not lost control, but his inventory has increased something like what, Antoine, compared to last year? Antoine?

[Antoine Auclair, executive]

A lot.

[Richard Lord, executive]

A lot. Maybe $60 million, $75 million?

[Antoine Auclair, executive]

Yes.

[Richard Lord, executive]

But I think it's very positive. I think it's a very positive risk because we expect the procurement to be more difficult in the couple of months to come because of whatever delays in freight transportation and various programs with some local Asian suppliers because it's our suppliers, because it's foreign [ typical ] to Asia as we speak now. So I think it's good to have a little bit more inventory at this time of the period, and I think that will -- that should continue to more sales, and that should contribute as a big advantage compared to some of our competitors, mainly in the U.S.

[Zachary Evershed, analyst]

That's helpful. And one last one. On National Builders, how big is the machinery business there? And in terms of margin profile, how does it compare to the rest of the business? And do you see any further growth in this area?

[Antoine Auclair, executive]

No, it's not material, Zach.

[Operator]

And at this time, Mr. Lord, we have no further questions. Please proceed.

[Richard Lord, executive]

Thanks, everyone. It's always a pleasure to talk to you. We look forward to meet you in person, hopefully as soon as possible in the course of 2022. Bye-bye, and have a good rest of the afternoon.

[Operator]

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

[Foreign Language]