R

Richelieu Hardware Ltd
TSX:RCH

Watchlist Manager
Richelieu Hardware Ltd
TSX:RCH
Watchlist
Price: 38.19 CAD 1.06% Market Closed
Market Cap: 2.1B CAD
Have any thoughts about
Richelieu Hardware Ltd?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
Operator

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware First Quarter Results Conference Call. [Operator Instructions] This call is being recorded on April 11, 2024. [Foreign Language].

R
Richard Lord
executive

Good afternoon, ladies and gentlemen. First of all, I have to apologize for my voice. I have a cold, so please -- I'll try to do my best to handle the speech. And welcome to Richelieu's conference call for the first quarter ended February 29, 2024. 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 findings. Our financial year began with a good first quarter. We pursued our acquisition strategy, closing 2 new acquisitions, followed by the 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 condition. 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. Regarding our first quarter margins, they were affected by 2 main factors: [indiscernible] lower gross margin and the start-up period of centers extended in 2023. Despite the significant reduction in our inventory over the past year, we still have certain inventories purchased at higher prices than current costs. The sales 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, we [indiscernible] our distribution centers, underwent expansion and modernization projects in 2023, including our new Calgary center, which went operational last December. The start-up 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 the startup and market [indiscernible]. As for acquisition, we are very pleased with the 3 businesses we have acquired since the beginning of the year. Olympic Forest products is a distributor of specialized lumber and panel products with the distribution centers in Erin, Ontario, and Rapid Start is a distributor of specialty hardware with a distribution center in Rittman, Ohio. On March 27, we completed the acquisition of AlleghenyPlywood, a distributor of specialty panels and decorative surfaces, which operates distribution centers in Pittsburgh and Allentown,Pennsylvania as well as in Cleveland, Ohio. In addition to contributing approximately $60 million to annual sales, these 3 transactions add new customers, complementary products and expertise and strengthen our presence in this market. I'll now hand over to Antoine for quarterly financial review.

A
Antoine Auclair
executive

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. Our 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, up 1.7%, 1.1% from internal growth and 0.6% from acquisitions. We reached CAD 175 million, an increase of 1.6% and represented 43% of total sales. Sales to manufacturers reached $120 million, 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 gross margin and our 2023 expansion projects being in start-up phase in the current market condition affected the EBITDA margin downwards. As a result, 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 noncash working capital balances was $35 million or $0.62 per share. The net change in noncash working capital used cash flow of $34 million, mainly reflecting the increase in inventories and the decrease in accounts payable and accrued liabilities 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 dividend of $8.4 million to shareholders, and we invested $15.5 million, including $7.4 million for 2 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 million and almost no debt. I now turn it over to Richard.

R
Richard Lord
executive

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 of team of 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 condition, we'll continue to seize and create opportunities while remaining service, innovation and result oriented. Thanks, everyone. Now I'll be happy to answer your questions.

Operator

[Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets.

H
Hamir Patel
analyst

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

R
Richard Lord
executive

That explains the drop in the EBITDA margin because of the what we call [indiscernible] inventory costs that are higher than the current cost. So that has cost us during the quarter, $3.5 billion. The modernized projects 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. There is also increase in expenses.

As you know, we haven't started yet to increase our own selling pricing that should happen down the year, in the fourth quarter or 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 million of additional expenses. So basically, I think things will improve. [indiscernible] The more the year is going to go, the [indiscernible] is going to improve. Mainly, I would say, from the first quarter, we expect the situation to improve.

A
Antoine Auclair
executive

And Hamir, one element to consider is that the Q1 is always the weakest period. So usually Q2, 3 and 4 are around 2 points higher than Q1 due to lower volume in Q1 versus the other quarters.

H
Hamir Patel
analyst

Okay. So it's fair to say then all being equal, if it's 2 points higher, it'd be sort of north of 12% would be kind of the low end for Q2?

A
Antoine Auclair
executive

Yes.

H
Hamir Patel
analyst

Okay. Fair enough. And then, are you able to, Richard, comment on sales comps across the business in the month of March?

R
Richard Lord
executive

Yes. What we've seen is that we have -- that the kitchen cabinet industry business has decreased by 3.7%. I would say the worst decrease come from the residential furniture. In Eastern Canada, for example, the residential furniture has decreased by 15%. So I think the people are making residential furniture, as we speak, have a hard time. So basically, this is the toughest market that we're dealing with. And I would say [indiscernible] we were with our market that is still sustaining good, like the [indiscernible] millwork, what we call the commercial innovation, it's higher by 4%. And 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%.

Operator

[Operator Instructions] your next question comes from Zachary Evershed from National Bank.

Z
Zachary Evershed
analyst

Sorry to hear you're not feeling well, Richard.

R
Richard Lord
executive

I feel pretty good. It's only a cold. It takes more than [indiscernible].

Z
Zachary Evershed
analyst

Perfect. So organic growth was 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?

A
Antoine Auclair
executive

It's Antoine. It's Antoine, 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.

R
Richard Lord
executive

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 penetration. I think our people are out there doing their job, selling the products and promoting and whatever has to be done. And we think with -- in the circumstances, we think that these results are very, very good.

Z
Zachary Evershed
analyst

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?

R
Richard Lord
executive

We have to reorder all the products. So basically, we have started -- we think that starting in the third quarter, we're going to see 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 have before, that means that the -- the economy is [indiscernible] indirectly into the gross margin because we have to work with the average cost. But basically, things will improve.

Z
Zachary Evershed
analyst

Got you. 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?

A
Antoine Auclair
executive

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 that 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.

Z
Zachary Evershed
analyst

That's very clear. I appreciate that. And then given 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 installed capacity, the amount of distribution centers you have in the U.S.

A
Antoine Auclair
executive

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

Operator

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

R
Richard Lord
executive

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

Operator

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