Richelieu Hardware Ltd

TSX:RCH

Earnings Call Analysis

Company shows moderate growth with strategic adjustments and challenges

Richelieu reported Q2 sales of $407 million, a 2% increase, driven by acquisitions despite internal sales declining by 0.7%. US sales rose 6.1% to $150 million, fueled by an 8.7% increase from manufacturers, though hardware retailers weakened. EBITDA fell 12.6% year-over-year to $53.8 million, and net earnings dropped 23.7% to $23.4 million, with EPS at $0.42. Richelieu is managing higher inventory costs and lower product prices from Asia, impacting margins. The company remains optimistic, anticipating improvement from new projects, expansion of distribution centers, and cost control strategies in the upcoming quarters.

Strong Yet Challenging Performance

In the second quarter, Richelieu Hardware reported sales of CAD 407 million, reflecting a modest increase of 2%. This growth was bolstered by acquisitions which contributed 2.7% to the revenue, although there was a slight internal sales decline of 0.7%. The U.S. market showed greater resilience, with sales climbing to USD 150 million, up 6.1%, driven primarily by a notable 8.7% growth in sales to manufacturers. Despite these gains, sales to hardware retailers in Canada fell by 10.6%, underscoring the mixed performance across different segments.

Earnings and Margins Under Pressure

Net earnings attributable to shareholders in the second quarter dropped sharply to CAD 23.4 million, a 23.7% decline year-over-year, primarily due to higher amortization costs linked to recent acquisitions. Consequently, earnings per share decreased from CAD 0.55 to CAD 0.42. The company's EBITDA for the quarter stood at CAD 53.8 million, representing a 12.6% reduction from the prior year, resulting in an EBITDA margin of 11.2%, down from 13% in the previous year. For the first half of the year, EBITDA fell 14.8% to CAD 94.2 million, with the margin at 10.6%, down from 12.6%.

Cash Flow and Financial Health

Operating cash flows for the quarter were CAD 55.7 million, down from CAD 74.4 million a year earlier. This decrease is attributed to lower net earnings despite improvements in inventory management, which contributed positively with a cash inflow of CAD 22 million. Richelieu's financial position remains robust, with a working capital of CAD 616 million and a current ratio of 3.3:1, indicating strong liquidity and almost no debt.

Future Guidance and Strategic Initiatives

Looking ahead, management expressed optimism about future profitability. They anticipate EBITDA margins will improve in the second half of 2024 as the company executes various projects aimed at enhancing operational efficiency. Specifically, anticipated cost reductions of CAD 1.5 million are expected from the rationalization of distribution centers, with another CAD 1.5 million expected upon exiting the current facilities, totaling an estimated annual savings of CAD 3 million for next year. With significant projects in partnership with retailers like Home Depot, and new management at Rona to stimulate business, Richelieu forecasts a stabilization and potential growth in the retail sector.

Adverse Events and Market Response

A minor strike at the Montreal warehouse impacted staffing but did not produce significant disruptions, as contingency plans were activated using other distribution centers. Although the strike affected only one of the 114 distribution locations, the company expects no material impact to their overall sales. Additionally, price pressures stemming from external factors such as rising operational costs are prompting expectations for a potential increase in product pricing, particularly from suppliers in North America and Europe, expected to begin in early 2025.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Richelieu Hardware Second Quarter Results Conference Call.

[Operator Instructions] This call is being recorded on July 11, 2024. [Foreign Language]

[Richard Lord, executive]

Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the second quarter and first half ended May 31, 2024. With me is Antoine Auclair our 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 continue to make good advances in the second quarter, thanks notably, to the valuable contribution of our acquisitions.

The strong support of our market development strategy and our value-added service. As a result, we achieved an increase in sales over the comparative quarter of 2023, which is appreciable in the current market condition. This rise reflects the good performance in our manufacturers market, especially in the U.S. with a growth of 8.7% in the quarter. Our sales retailers and renovation superstores we have done in Canada and U.S., resulting from a softer market and the impact of some price reduction. Nevertheless, we are currently working on many interesting projects with retail customers that will generate additional sales in the coming periods. In addition, the Centralization project in Western and Eastern Canada will continue to support our growth in this market. We also focus on the ramp-up and development of our centers that we were expanding and modernizing in 2023.

We are happy with this investment that were implemented to better service our customers, support our growth and access new territories. We already see significant increase in sales versus last year in all of these projects. And now I'll hand it over to Antoine for the financial review of the quarter and first half.

[Antoine Auclair, executive]

Thanks, Richard. Second quarter sales reached $407 million, up 2%, resulting from a positive contribution from the acquisition of 2.7% and an internal decrease of 0.7%. In Canada, sales amounted to $276 million, down 1.1%, of which $2.8 million from internal decrease, partially offset by a 1.7% positive contribution from acquisitions. Sales to manufacturers reached $232 million, up 0.9% and for the hardware retailers, sales stood at $44 million, down 10.6%. In the U.S., sales grew to USD 150 million, up 6.1%.

Sales to manufacturers reached USD143 million, up 8.7%, and hardware retailers and renovation superstores market, sales reached $7.4 million, down $2.9 million. In Canadian dollars, total sales in the U.S. reached CAD 205 million, an increase of 6.5%. For the first half, sales reached $888 million, up 1.5%, of which 0.5% from internal decrease, offset by 2% from acquisition. In Canada, sales reached $508 million, slightly down by $2.1 million or 0.4%, of which 2.2% from internal decrease and 1.8% from acquisitions.

Sales to manufacturers reached $420 million, up $4.3 million or 1%. Sales to hardware retailers and renovation superstores reached $88.2 million compared to $94.6 million, down 6.8%. In the U.S., sales amounted to USD 280 million, up 4%, of which 1.7% from internal growth and 2.3% from acquisitions. We reached CAD 380 million, up 4.2%, accounting for 43% of total sales. Sales to manufacturers totaled USD 264 million, an increase of $13.5 million or 5.4%, of which 2.9% from internal growth and 2.5% from acquisitions. Sales to hardware retailers and renovation superstores were down 14% compared to last year.

Second quarter EBITDA reached $53.8 million, down $7.7 million or 12.6% over last year. Growth and EBITDA margins continued to be under pressure due to temporary factors, including inventory, that's higher than current purchasing costs, lower selling price for certain product originating mainly from Asia, plus the temporary impact resulting from the expansion projects. Consequently, EBITDA margin stood at 11.2% compared to 13% last year. First half EBITDA reached $94.2 million, down 14.8%. As for the EBITDA margin, it stood at 10.6% compared to 12.6% last year.

Second quarter net earnings attributable to shareholders totaled $23.4 million, down 23.7%, mainly due to amortization resulting from new business acquisitions and expansion projects. Net earnings per share were $0.42 compared to $0.55 last year, a decrease of 23.6%. First half net earnings attributable to shareholders reached $38.7 million, down 27.2%. Diluted net earnings per share stood at $0.69 compared to $0.95 last year. Cash flows from operating activities before net change in noncash working capital balances was $45.1 million compared to $50.8 million last year. Net change in noncash working capital items generated a cash inflow of $10.7 million.

Inventories continue to reduce as planned with a positive effect of $22 million this quarter. As a result, operating activities provided a cash inflow of $55.7 million in the quarter compared to a cash inflow of $74.4 million in 2023. For the first half, cash flows from operating activities represented a cash inflow of $56.2 million compared to a cash inflow of $93.2 million last year. For the second quarter, financing activities used cash flow of $38.6 million compared to $17.8 million last year. During the quarter, the corporation paid lease obligation of $10 million distributed dividends of $8.4 million and paid interest on bank overdraft of $700,000.

During the quarter, we also repurchased 481,000 common share for $18.6 million. First half financing activities used cash flow of $57.6 million compared to $29.8 million in 2023. During the first half, we invested $36.2 million, $17 million for the 3 business acquisition and $19.2 million, primarily for investments related to the consolidation of our new Calgary warehouse and the purchase of equipment to maintain and improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of $616 million for current ratio of 3.3:1 and almost no debt. I now turn it over to Richard.

[Richard Lord, executive]

Thank you, Antoine. First, I'd like to say something about the situation in our Montreal warehouse, where last month, some 125 employees with collective agreement expired last December went on strike. We have taken appropriate measures to ensure that all our local customers continue to be served thanks to the contingency plan we have put in place.

It has to be noted that strike affect just 1 of our 114 distribution centers and a small portion of our 3,000 employees. We are confident that a mutually beneficial agreement will be reached very soon. To conclude, we will continue to focus on the development of our expanded and modernized distribution centers in the U.S. as well as our new Calgary location, which enables us to effectively support growth of our manufacturers market, in addition to centralizing the distribution of all products for retailers in Western Canada. As well, we will pursue our projects undertaken in the second quarter regarding the consolidation of our distribution activities for retailers in Ontario and Eastern Canada.

We are well positioned to seize new opportunities in the renovation market and to benefit from the expected increase in demand in the context of the housing shortage in Canada and in the U.S. Our focus is on profitable growth. This means keeping tight control of our costs and pursuing our winning strategies of innovation, service and acquisition. Thanks, everyone. We'll now be happy to answer your question.

[Operator]

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

[Hamir Patel, analyst]

Are you able to share how your year-over-year sales are tracking in Q3 to date for both manufacturers and retailers?

[Antoine Auclair, executive]

Yes, let me get my report.

[Richard Lord, executive]

I have that not very far from me. Regarding the kitchen and the [ cabinet ] market, we're flat compared to last year, which is a positive sign because kitchen and cabinet manufacturers represent about [ 20% ] of our sales. Interesting to mention that the commercial innovation, which were we consisted of [indiscernible] and commercial projects is increasing by -- in total by 4.3%. Including 6% in the U.S. That's very positive.

Other specialized market that is including the -- what we call the closet market here, we're up by 5% all over North America. So it's pretty positive. And we see the downside though on the door and window manufacturers, which is typically related to the new construction and the residential and office furniture that are down for many reason that we know about office furniture maybe because of the people working from home.

So basically, these are positive signs that our manufacturers market is behaving quite well. The retailers as a matter of fact, remains down, but we expect this market to improve because of the many projects that we have undertaken on with many of our retail customers. We have new products that came out in the Home Depot stores in Canada, 3 months ago. We have a new project with Home Depot that will be delivered next fall, I mean, October and November.

Many new projects with Rona. Now that at Rona, you know, they have a new executive that has taken place. A new president, a new Vice President. So basically, their mandate is to revive that company that has been, I would say, sleeping for a few years because of what you knew that Lowe's wanted to sell its operation in Canada.

So basically, we have many positive signs that give us a clear demonstration that the future looks great to the retailers in Canada. In the U.S., unfortunately, our sales are down because we have lost 1 customer, but we are in the process of compensating those sales -- those lost sales with new customers. What happened with the customers I'm talking about is because they have decided to buy their own products overseas. That's their choice. We don't think it's a good choice, but this is what they have decided. But we think before the end of the year, we should have recaptured that business with all their customers.

[Antoine Auclair, executive]

And Hamir, that's pretty much what we're seeing since the beginning of Q3 as well. So the trend is pretty similar so far.

[Hamir Patel, analyst]

Okay. And Richard, that customer, you mentioned that you lost in the U.S. Was that -- that was a retailer customer?

[Richard Lord, executive]

Yes. It's a retail customer. Yes, yes. I was talking about the retail market, yes.

[Hamir Patel, analyst]

Perfect. And all the figures that you ran through, appreciate all that, was that organic? Or is that kind of...

[Richard Lord, executive]

Organic only. Organic only. Not including any acquisition.

[Hamir Patel, analyst]

Okay. No, that's very helpful. And then, Richard, just turning to -- in Q2, you had a 0.7% organic decline, how much of that was weaker volumes? And how much was maybe some price deflation? Because I know you highlighted pricing on products from Asia were down a bit.

[Richard Lord, executive]

I will let Antoine try...

[Antoine Auclair, executive]

If you go a bit more in detail, if you look at the reduction in the retail business in Canada, it's pretty much coming all of it from price reduction. The rest -- we have some price reduction in the industrial business, but not necessarily material, but the one big ticket item regarding price reduction, it's the retail business in Canada, and it's pretty much all coming from there.

[Richard Lord, executive]

Mainly for the products that we are importing from Asia.

[Hamir Patel, analyst]

Okay. So the volumes were pretty stable year-over-year?

[Richard Lord, executive]

Yes, in quantity the products sold, it's stable yes.

[Hamir Patel, analyst]

Okay. And then Richard, as you look out over the next 18 months, I know Asia is a small piece of your product mix, but are you seeing any signs of perhaps upward price momentum because I think for most of your products, there hasn't been any price increases for some time.

[Richard Lord, executive]

You're absolutely right. And our operating costs continue to increase, the salary continue to increase as well as the price of the rents, the leases that we have to pay. I feel that the market will start to increase its price. Mainly the product from Europe from America should start to increase. We've seen that with the finishing products, the lacquer and what we call the paint for the wood product that we sell. So we had our first price increase last month and expect that the North American products and European products will start to increase early next year. That's not only a hope. I think these guys also have the operating cost increasing and they're going to have to do something.

Asia is still slow. The only problem with Asia is that they have not much to do as we speak. So they don't increase the price, but that could change very quickly.

[Hamir Patel, analyst]

And Richard, if you see price increases on the Europe and Asia products, are you getting a sign from your suppliers as to scale of those increases that they might be looking to realize?

[Richard Lord, executive]

Not yet. It was in meeting with an important customer a couple of days ago, which is Blum, which is a huge supplier. They have a price increase in mind, but they would not say -- put that in number on the table as we speak. So basically, I cannot answer really that question.

[Operator]

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

[Zachary Evershed, analyst]

In terms of the rationalization, the cost base that you guys are entertaining in Eastern Canada and Ontario, can you give us a breakdown of the cost savings that you're expecting perhaps by bucket?

[Richard Lord, executive]

Cost saving is important. I will let Antoine answer the question, but I would -- let's say, I would like to make a few comments regarding the effect on our customers because what we are doing, we're centralizing some distribution centers that are mainly servicing the hardware retailers. In the retail market, initially you used to get something like 6 different product lines, which, as we speak, have distributed through 6 different warehouses, because we have -- these are the results of many acquisitions that we've made in the past.

So when we centralize that, what we do for the customers, for the small customers because at the retail business, we sell to owner, for example, to Home Depot and hardware and those customers. They buy through their distribution centers, which is easy, it can be shipped from any warehouse. But for the small customers that want to make a -- place a purchase at Richelieu. We have 6 different products coming from 6 different warehouses, that mean that we have 6 different prepaid -- in order to have their freight for free.

They have to buy $500 each of the product line. So which is a burden for the small customers. So since we combined everything at the same place, the same prepaid order, $500 applies for all the products. So that will create more sales because the customers, they don't have that benefit from others from our competitors, and they will make their life easier in order to manage their stores. And they will save money as we will because we're combining those distribution centers, we save on operating costs, and we save on the product ending and everything else because we still use the same sales force the difference would be in the labor force in the warehouse, Antoine?

[Antoine Auclair, executive]

Regarding cost reduction, Zach, we're talking about close to $1.5 million in terms of reduction in costs and another $1.5 million when we'll be able to exit the location that we're in. So that should be happening before now and the end of the year. So close to $3 million, next year.

[Zachary Evershed, analyst]

Those are annual numbers, not quarterly, right?

[Antoine Auclair, executive]

Annual numbers.

[Zachary Evershed, analyst]

Perfect. And then would you be able to quantify the dollar impact of the strike in Montreal? Or would it not be material?

[Richard Lord, executive]

We don't think it will be material. We don't have any -- first of all, as I said that it would be fixed very shortly. And we don't see -- that should be very detrimental to our sales because we -- the contingency plan is very effective. And we have used our Mississauga, Ottawa, Quebec, Edmonton and Nova Scotia warehouses in order to continue to serve our customers effectively. The nonunionized people here were working in the warehouse in Montreal. They did a fantastic job. These guys are efficient.

They have learned very fast how to do the job, and it was amazing to see the [indiscernible] and the conveyors running and getting the boxes out of that warehouse. So we don't expect any huge benefit. But it's still early to evaluate the all the impacts, Antoine, what do you think?

[Antoine Auclair, executive]

No, you're correct. We were monitoring the lines shipped all across our network. So versus what we were shipping before. So we haven't seen major impact. There will be a small impact, of course, that's for sure, but nothing material from our point of view as we speak.

[Zachary Evershed, analyst]

That's helpful. And then my line did cut out for a moment, so apologies if this has already been asked. But have your expectations for margin levels for 2024 changed at this point in time?

[Antoine Auclair, executive]

So as you can see, second quarter is pretty aligned with the first quarter. The gap between the EBITDA margin last year reduced in the second quarter. So it's going to reduce as well in the third and the fourth quarter, it's going to improve. The second half should be better than the first half. That's for sure. And next year, if -- when we're going to see the market coming back, we should also see an improvement in margin if the market is improving.

[Operator]

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

[Richard Lord, executive]

There's no more question. Thanks again. It's always a pleasure to talk to you. Do not hesitate to contact us for more information. Thank you very much. Have a good afternoon.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.