Richelieu Hardware Ltd

TSX:RCH

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Second Quarter 2022 Conference Call. [Operator Instructions] Also note that the call is being recorded on July 7, 2022. [Foreign Language]

[Richard Lord, executive]

[Foreign Language] Thank you. Good afternoon, ladies and gentlemen, and welcome to this Richelieu's conference call for the second quarter and first 6 months ended May 31, 2022. 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.

We achieved strong growth in the second quarter as reflected in our results with a 31.4% increase in total sales, including a record 55% increase in the U.S. sales, a 25.8% increase in net earnings per share and a sound financial position with a 24.4% return on average equity.

We are benefiting from our recent acquisitions and the investments that we have made in recent years in new market segments and strategic areas, both in Canada and in the U.S. Our dynamic and sustained market development and penetration efforts continue to pay off, and each market segment made a solid contribution to the quarter's growth.

In Canada, we achieved a 17.3% increase in sales. And as I mentioned earlier, we realized a record 55% increase in the U.S. market. Overall, increases in the manufacturers and the retailer's market were 34.6% and 15.2%, respectively. The expansion of our customer base and network, the diversification of our market segment, coupled with our ongoing innovation strategy and our value-added multi-access service, are the key drivers of our growth. I will now hand it over to Antoine for a review of the results and financial situation of the quarter.

[Antoine Auclair, executive]

Thanks, Richard. Second quarter sales reached $487.9 million, up 31.4% of which 16.1% from internal growth and 15.3% from acquisitions. At comparable exchange rates last year, sales increase would have been 30.1%. In Canada, sales amounted to $292.3 million up 17.8%, of which 11.3% from internal growth and 6.5% from acquisitions. Our sales to manufacturers reached $237.3 million, up 17.3%, of which 19.9% (sic) [ 12.9% ] from internal growth and 4.4% from acquisitions. As for the hardware retailers, sales stood at $55 million up 20.4%, of which 4.3% from internal growth and 16.1% from acquisition.

In the U.S., sales grew to USD 154 million, up 54.8%, 22.7% from internal growth and 32.1% from acquisitions. Sales to manufacturers reached USD 142 million , up 63%, 26.4% from internal growth and 36.6% from acquisitions. In the hardware retailers and renovation superstores market, sales were down 1.6%. In Canadian dollar, total sales in the U.S. reached $195.6 million, an increase of 58.6% and representing 40.1% of total sales.

For the first half, sales reached $872.4 million up 30.4%, of which 16.2% from internal growth and 14.2% from acquisitions. In Canada, sales reached $521.6 million up $80.3 million or 18.2%, of which 11.9% from internal growth and 6.3% from acquisitions. Sales to manufacturers reached $422.8 million up $67.3 million or 18.9%. Sales to hardware retailers and renovation superstores reached $98.8 million compared to $85.8 million up 15.2%.

In the U.S., sales amounted to USD 276.1 million up 52.3%, of which 23.1% from internal growth and 29.2% from acquisitions. They reached CAD 350.8 million up 54.1%, accounting for 40.2% of total sales. Sales to manufacturers totaled $252.6 million, an increase of $96.5 million or 61.8%, of which 28.3% from internal growth and 33.5% from acquisitions. Sales to hardware retailers and renovation superstores were down 6.7% compared to last year.

Second quarter EBITDA reached $77.9 million up $16.9 million or 27.7% over last year, resulting from increased sales and continued control of expenses. Gross margin declined slightly, and the EBITDA margin stood at 16% compared to 16.4% last year. First half EBITDA reached $131.6 million up 32.8%. As for the EBITDA margin, it stood at 15.1% compared to 14.8% last year.

Second quarter net earnings attributable to shareholders totaled $47 million up 25.5%. Net earnings per share were $0.84 basic and $0.83 diluted compared to $0.67 basic and $0.66 diluted last year, an increase of 25.4% and 25.8%, respectively.

First half net earnings attributable to shareholders reached $77.1 million up 32%. Diluted net earnings per share stood at $1.37 compared to $1.03 up 33%.

Second quarter cash flow from operating activities before net change in working capital amounted to $60.7 million or $1.07 per share an increase of 28.5% resulting primarily from the net earnings growth.

Net change in non-cash working capital used cash flow of $63.7 million, mainly reflecting increases in inventories of $44.1 million, resulting from higher demand and cost of supply increases. Change in account receivable and other items used cash flow of $19.6 million. Consequently, operating activities used cash flow of $3 million. For the first half, cash flow from operating activities before net change in working capital were up 32.4% totaling $103 million or $1.83 per share.

Net earnings in non-cash working -- net change in non-cash working capital balances used cash flow of $143.8 million primarily representing changes in inventories that used cash flow of $117.3 million and accounts receivable and other items used cash flow of $26.5 million. Consequently, operating activities used cash flows of $40.5 million compared to a cash flow of $55.9 million last year.

For the second quarter, financing activities used cash flow of $21.5 million compared to $7.4 million last year. Dividends paid to shareholders of the corporation amounted to $7.3 million compared to $3.9 million in the same period of 2021. We also repurchased common share for an amount of $7.9 million.

First half financing activities used cash flows of $29.8 million compared to $23.9 million in 2021. Dividends paid to shareholders amounted to $14.6 million compared to $11.6 million last year.

During the first half, we invested $52.4 million for the 3 business acquisitions made in the first quarter and $10 million for the purchase of equipment to maintain and improve operational efficiency as well as further IT investments.

We continue to benefit from a healthy and solid financial position with a working capital of $481.5 million for a current ratio of 2.8:1 and an average return on equity of 24.4%. I now turn it over to Richard.

[Richard Lord, executive]

Also, we'd like to reinforce the fact that our sales are now above 40% in the U.S. market, so -- which represents an important milestone for us as we are getting closer and closer to the 50% mark. We continue to expand our U.S. network to capture market demand. As previously announced, we completed last year the expansion of our Detroit, Orlando, Boston and Dallas locations, while opening 2 centers in Rochester and Reading. In addition, this year, we started the expansion of our Atlanta, Fort Myers, Chicago and Pompano locations, which are progressing very well and are on the schedule.

The manufacturer's market remains strong, and our customers are still very busy, while the retailers market round has been fueled via the acquisition of Uscan and Task Tools. While pursuing the integration of our most recent acquisition, we are still watching the acquisition market closely and hope to seize new opportunities that fit our criteria by the end of the year. We remain focused on innovation, acquisition and value-added service strategy as well as on cost control in order to continue to grow profitability. Thanks, everyone. We'll now be happy to answer your questions.

[Operator]

[Operator Instructions] And your first question will be from Hamir Patel at CIBC.

[Hamir Patel, analyst]

Richard, are you able to share with us in terms of the growth in the quarter how much was driven by price versus volume?

[Richard Lord, executive]

We estimate it's an approximation, but we think the price increases, as we speak, affect the sales by something like 10% to 12%. So basically, we think that the goal that we've seen actually is very healthy.

[Hamir Patel, analyst]

Okay. Fair enough. And then, Richard, when you think out about the year ahead and if we were to enter a recession here, how do you think about the risks of price deflation across your product categories?

[Richard Lord, executive]

I think we're still far from a price deflation. The price will probably -- I would say the freight costs might decrease. I would say it has started already decrease, but before that the industry in North America feel the effects of the decrease in freight, that will take a few months. Probably that will go until the second quarter of 2023. So that will apply to the figure as well.

Regarding the cost of the products, even though we see changes in the price of the commodities like steel, aluminum and that type of thing, we think that actually -- the shortage of labor is worldwide, and we don't feel that the -- any supplier would be in a position to decrease their pricing unless maybe temporarily.

So basically, we don't see the deflation as being at our doors as of now. That might come in the future, but I would say that with the decrease of the freight costs and whatever is going to happen in the months to come, we have to turn our inventory at least one time again, and then we're going to get into the new costing strategy.

But I've been here for 35 years. I've never had to decrease any pricing. So I would say the world and the suppliers will find a way to keep the price at the level that they are, except for the freight. That has to go down. There's no doubt in our mind. But the cost of the freight not one is, what, 3% of our average of the purchasing of our products. So that's not a huge effect on the pricing.

[Hamir Patel, analyst]

Okay. Fair enough. And I wanted to ask about M&A. The company had been quite active in 2020, 2021. We haven't seen any new deals yet this year. Could you comment on how the pipeline looks? And have you seen any moderation in vendor expectations just given the deteriorating housing outlook in the U.S?

[Antoine Auclair, executive]

No. It's -- I mean it's just timing. So we're working on many files in Canada and the U.S. as well. So it's just the timing of closing these files. So the pipeline is still very healthy.

[Richard Lord, executive]

And also -- I mean, we're planning to open new greenfield start in certain areas of the U.S. in the months to come as well. Just to mention Minneapolis that we have made the decision yet that the decision has been made. So basically, and we have other spots where we would like to open new distribution centers in the future even though if we don't make acquisitions. So we have to combine the new establishment, the new location for us with the acquisition. And that should -- basically, that should continue to fuel our growth in the future.

[Hamir Patel, analyst]

Okay. Fair enough. And just the last question for me. I'm not sure if you have this handy, but could you speak to how sales in the month of June fared on both the manufacturer side and with retailers?

[Antoine Auclair, executive]

It's very similar versus what you've seen in the quarter.

[Operator]

Next question will be from Zachary Evershed at National Bank.

[Thomas Bolland, analyst]

It's actually Thomas calling in for Zach. Most of our questions have been answered. Maybe one. We're trying to drill down on the margin trajectory here. Was there any benefit from low-cost inventory on gross margins? And how fast is that fading if there is? And then I'll have another one now.

[Antoine Auclair, executive]

Yes. We're looking more at the EBITDA level. So EBITDA level, we're around the 16% mark. So what we're seeing towards the end of the year, we're seeing high 14s or 15% to 15%. So the post-COVID, the normalized margins should be around that level, so high 14%, 15%.

[Thomas Bolland, analyst]

Okay. Perfect. And last one for me. Now that shipments might be coming in faster, do you think you're going to have to incur additional warehousing costs? And is there any signs of retailers needing to dial back on some orders as they build inventory?

[Richard Lord, executive]

You're absolutely right. Actually, since the shipment of our suppliers from where we're faster, you see that we already have an excess of inventory. That should continue on for a month, a month or 2 maximum. After that, you should -- we should see a decrease of the inventory.

And okay, I have to complete my answer, with the additional warehouse costs, you're absolutely right. I would say that actually this year, overall, we're going to pay to close to $4 million in additional costs for warehousing those excess inventory. But on the other side, though, if you remember, we used to pay extra money in order to get our containers faster here in Canada and the U.S. So we expect that will not be the case again in the third and fourth quarter. So basically, we're going to save money there and we have to pay the extra warehouses, which is normal in the type of business we are in.

[Operator]

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

[Meaghen Annett, analyst]

Is there any insight you can provide -- is there anything you can talk about with regards to what your customers are expecting for 2023 at this point? Like how long are backlogs typically? And at what point do you start to get some visibility out to 2023?

[Richard Lord, executive]

So as we speak now, our customers are still very busy. Just to give you, in the last quarter in the U.S., for example, the kitchen manufacturers market in the U.S., kitchen manufacturing customers have bought 25% more for the quarter. And this is continuing on as we speak now. We see the commercial wood workers in our business in the U.S. have been increasing by 35%. That's without acquisition. That was for the last quarter. And we have other specialized market where the new market that we have invested in the last few years, and we see a benefit actually a sales growth of 35% in U.S. again and something like 20% in Canada.

So the market is still strong and healthy. And as we speak, we still see the same growth. And when we speak with our customers, they are still busy at least for the next, I would say, the 4 to 5 months it's hard to tell you how much we're going to do in 2023. But what we see is that most of our customers are busy still. And those that have some restriction, some labor restriction, for example, what I hear from the customers that I spoke to myself is that they have less employees but they choose the best opportunity for them. So they're going to choose the best contract, the kitchen -- the higher price kitchen cabinet that are usually fully equipped with Richelieu products. So that does bring some positive benefit as well.

So that's what we see so far. But I'm still very optimistic for 2023 because I think the renovation market is there. It's a must that people need to do some renovation. As far as the recession, if we see that a recession is coming, attrition, we don't see that. I think it's a good thing that would be -- I don't know if I could put it that way, but not a bad thing for Richelieu to see a recession coming because usually, Richelieu does very well during the recession. We make more acquisitions and that could fix the labor shortage situation and the inflation for our customers as well as for us. So basically, we see the future as being very, very positive.

[Antoine Auclair, executive]

Yes. And Meaghen, the market share in the U.S., there's so much to gain. So even in a recession, we have so many customers we can touch on. So we're very confident about what we're seeing in front of us.

[Meaghen Annett, analyst]

Great. And then I just had a question on free cash flow. So you talked a bit about the inventory and some of the dynamics there. But free cash flow for the business was negative for the first half of the year. So do you have any comments as to what we could expect for the second half related to working capital as it relates to inventory? Would you expect that to be a source of cash? Or will you continue to reinforce your inventory position?

[Antoine Auclair, executive]

Yes, the first half of the third quarter, we should continue to build the inventory, and it should reverse -- start reversing afterwards.

[Meaghen Annett, analyst]

And then just last question, Antoine. I wanted to follow up on your comments around the EBITDA margin. So are you effectively raising your expectation from 13.5% to 14%, up to the high 14% to 15%?

[Antoine Auclair, executive]

Right. For this year, the high 14%, 15% makes sense for the -- Let's say, a post-COVID normalized margin, I would say if we have those kinds of -- these levels of volume, I would say, the high 14s could make sense.

[Operator]

And at this time Richard Lord, we have no other questions registered, sir.

[Richard Lord, executive]

So there's no more questions. Thank you again for attending. We'd be happy to talk to you if you wish to give us a call or visit us. So thank you very much and have a nice day.

[Operator]

Thank you, sir. 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 lines.