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Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Third Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded today, October 8, 2020. [Foreign Language]
Thank you. Good afternoon, ladies and gentlemen, and welcome to this conference call for the third quarter and 9-month period ended August 31, 2020. With me is Antoine Auclair, CFO.As usual, note that some of today's issue will include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings.The third quarter was a period of strong growth and high profitability. We achieved these results, thanks to our successful business strategy, notably the one-stop shop approach of our manufacturers market in various segments such as kitchen cabinet, architectural woodworking, furniture, closet, glass, door and window hardware, just to name a few; our hardware retailers and renovation superstores market; our work strategy that stands out with richelieu.com; our competent team; and operational agility that allowed us to react quickly to the current environment.I would like to highlight the strong sales growth of 82.5% in the hardware retailers and renovation superstores market, stemming from the contribution of Mibro acquired at the beginning of the year, which accounts for 36% and from a substantial increase in demand and higher cyclical sales in the quarter. As we speak, sales to hardware retailers represent 18% so far this year compared to 14.5% last year. Also, point out that improvement in the EBITDA -- I also want to point out the improvement in the EBITDA margin to 15.8% compared to 12.6% last year. And the 56.3% increase in diluted net earnings per share, standing at $0.50 compared to $0.32 last year.In addition, during the quarter, we concluded 2 new acquisitions for a total of 5 this year. Those acquisitions altogether will result in additional sales of over $70 million on an annual basis.As announced last July, we acquired Central Wholesale Supply in Richmond, Virginia, which give us access to this new geographic market. Then on August 4, we acquired Lion Hardware in New Brunswick, specializing in window and door hardware products and serving all of Eastern Canada. In addition to expanding our offering and customer base in this market segment, where we have already acquired 2 specialized distributors in 2019, Lion Hardware completes our Canadian coverage of this market segment.Regarding the current pandemic situation, we continue to rigorously apply the measures required by the relevant authorities. In addition, we still have some 600 people -- 600 of our employees still working from home. We adjust our cost structure as the situation evolves. Approximately 5% of our workforce is still impacted by layoffs or reduced hours, and we are still limiting business travel by using technology such as video conferencing.I'll now go to Antoine for the financial review.
Thanks, Richard. Third quarter sales reached $311.2 million, up by 15.6%, of which 6.9% from internal growth and 8.7% from acquisitions. In Canada, sales amounted to $203 million, up by 12.8%, of which 8.2% from internal growth and 4.6% from acquisitions. Our sales to manufacturers reached $154.3 million, up by 4.2%.As for the hardware retailers and renovation superstores market, sales stood at $48.7 million, up $16.8 million or 52.7%, of which 40.7% from internal growth and 12% from acquisitions. This significant increase is the result of major growth in the renovation market in Canada as well as higher cyclical sales than last year.In the U.S., sales grew to USD 80.6 million, up $13.1 million or 19.3%. Sales to manufacturers reached USD 68.7 million, an increase of 6% over the third quarter of 2019, of which 7.1% growth from acquisition and 1.1% from internal decrease. Sales in U.S. dollar to hardware retailers and renovation superstores were up 340.7% compared to last year, including 247.4% growth from our Mibro acquisition and 93.3% from internal growth. As in Canada, the renovation market in the United States has been growing strongly, resulting in a major increase in sales in this market. The company also benefited in the third quarter from higher cyclical sales.Total sales in the U.S. reached CAD 108.2 million, an increase of 21.2% and representing 34.8% of total sales. For the first 9 months of 2020, sales totaled $808.8 million, up 4.1%, of which 7.4% growth from acquisition and 3.3% from internal decrease.In Canada, sales reached $514.9 million, up by $8.2 million or 1.6%, of which 4.8% from acquisition and 3.2% from internal decrease. Sales from manufacturers reached $406.4 million, down $11.5 million or 2.8%, of which 4.1% growth from acquisition and 6.9% from internal decrease. Sales to hardware retailers and renovation superstores reached $108.5 million compared to $88.8 million, up 22.2%.In the U.S., sales amounted to USD 217.4 million, up 7.2%, of which 11.9% growth from acquisition and 4.7% from internal decrease. They reached CAD 293.9 million, up by 8.8%, accounting for 36.3% of our total sales.Sales to manufacturers totaled USD 190.4 million, an increase of $5.3 million or 2.9% over the same period last year, of which 5.2% growth from acquisition and 2.3% from internal decrease. Sales to hardware retailers and renovation superstores were up 53% compared to last year.Third quarter EBITDA reached $49.1 million, up $15.2 million or 44.8% over last year, resulting from significant increase in sales in the retailers market together with action to reduce costs and government subsidies. Gross margin remained stable, and the EBITDA margin stood at 15.8% compared to 12.6% last year.For the first 9 months, EBITDA reached $107.7 million, up 20.8%. The gross margin remained stable. As for the EBITDA margin, it stood at 13.3% compared to 11.5% last year.Third quarter net earnings attributable to shareholders totaled $28.7 million, up 56.6%. Net earnings per share were $0.51 basic and $0.50 diluted compared to $0.32 basic and diluted last year, an increase of 59.4%. For the first 9 months, net earnings attributable to shareholders reached $58.1 million, up 22.8%. Diluted net earnings per share stood at $1.03 compared to $0.83, up 24.1%.Third quarter cash flow from operating activities before net change in working capital balances amounted to $38.1 million or $0.67 per share, an increase of 43.8% compared to last year, resulting primarily from the net earning growth. For the first 9 months, they were up 21.2%, totaling $85 million or $1.50 per share.For the third quarter of 2020, financing activities used cash flow of $9.2 million compared to $11.6 million last year. Dividends paid to shareholders of the corporation amounted to $3.8 million, up 4.2%. For the first 9 months, financing activities used cash flow of $19.9 million compared to $29.1 million in 2019.During the third quarter, we invested $12.9 million, including $9.7 million for the 2 business acquisitions. During the first 9 months, we invested $42.3 million, of which $33.1 million for the 5 business acquisitions and $9.2 million primarily for the purchase of equipment to maintain and improve operational efficiency. We continue to benefit from a healthy and solid financial position, cash balance of $74.5 million, almost no debt, a working capital of $376.2 million for a current ratio of 3.6:1. I now turn it over to Richard.
Thank you, Antoine. We remain quite confident, but still watchful. Looking back at September, we can see an upward trend in the manufacturers market and still very strong in the hardware retailers and renovation superstores market. But we understand this is due to exceptional circumstances. We continue to build on our strengths and value-added concept in order to provide distinctive and outstanding service to our customers.With a business model well adapted to customer needs and a sound financial position, Richelieu is well positioned to pursue its innovation, market penetration and acquisition strategy, which are our main growth drivers.We also announced that this morning, the Board of Directors approved the payment of a quarterly dividend of $0.0667 per share payable on November 5.In conclusion, I would like to thank our team and business partners for their support in this challenging period. Thanks, everyone. We'll now be happy to answer your questions.
[Operator Instructions] And your first question will be from Hamir Patel at CIBC Capital Markets.
Congratulations on the strong Q3 results. Richard, could you -- you gave some comments on how September was faring qualitatively. Could you quantify how your sales fared in the month of September?
I could say that -- I think we -- our sales to manufacturers are with, I would say, around 5% increase. And I guess this trend should continue at least until, I would say, Christmas, which we don't know after Christmas though. As far as for the hardware retailers, the market remains very strong. Maybe not as strong as it was in the last quarter, but still very strong. So we expect a very good growth in this market as well.
Okay, great. That's helpful. And Antoine, did -- you had the -- I think it was $3 million, just over $3 million of government grants in Q2. How much did you get in Q3? And would you expect to get anything in Q4?
$3.5 million in Q3 and nothing in Q4.
Great. That's helpful. And Richard, when we look at the EBITDA margins, clearly, a step change over the last 2 quarters. The 15.8%, do you think you could sustain that into Q4? And as the hardware retailers market maybe normalizes next year, what's your objective for long-term margins?
I think the margin -- the EBITDA margin should still be very good in the fourth quarter. And -- but I would say, when the situation comes back to normal, I think the better comparison that we can have is with 2019. But for the time being, on the short term, yes, the margin will continue to be strong. It's at the -- our gross margin is rather stable. I think the increase in EBITDA margin is the result of reduced expenses. And yet, the additional sales, mainly in the retailers market, that brings -- without increasing our expenses much. Still, we have to mention also that we spend more because I think all the distribution centers that deliver to the hardware retailers are working 7 days a week since 2 months. So it does increase the expenses to a certain extent, but it's minimal compared to the positive effect of those additional sales on the EBITDA margin.
[Operator Instructions] Our next question will be from Zachary Evershed at National Bank Financial.
Congratulations on the quarter. So for retailer sales, you mentioned that the current quarter will be a little less strong than last quarter. Can you help us understand the performance throughout Q3, perhaps when the peak in retailer sales was?
Yes, maybe we can say. It's a peak. It's been a very strong period. And the cyclical sales were quite high. We don't expect that in the fourth quarter. But for the regular sales, I think the type of growth that we had in the third quarter should continue on. Maybe not to be as high, but still be quite, I would say, very high in the circumstances. So it's much over 25%.
And with Lion Hardware, you've completed your Canadian coverage for windows and doors. Do you have a next area of interest that you'll be looking to flesh out your coverage in?
Yes, we still have other targets to improve our market presence in Canada. And now we -- maybe we'll be open to make that type of acquisition in the U.S. as well.
Okay. That's interesting. And in terms of the pace that you're on, you've been doing exceedingly well this year compared to your historical average. Do you see yourself maybe expanding the range of targets looking for larger acquisitions in the future?
Anything that is moving that would be interesting for us, we will target. But actually, we still work within the same range because this is what is available in the market. But we keep our eyes open. If eventually something bigger comes to our attention, you can be sure of one thing. We're going to make our necessary analysis to justify a possible acquisition.
That's helpful. And then one last one for me. In terms of your negotiations with acquisition targets, has COVID brought in any changes to the structure of the deal, maybe a difference in the earn-outs or just a different caliber of negotiations, I guess?
No. So far, it has not changed anything. We expect maybe after the COVID that there will be more company for sale because the people that have been in business for 30 or 40 years, maybe they have enough of the various questions that we have to get through in the financial and the business market in North America.
Next is a follow-up from Hamir Patel.
Richard, this year, a lot of the growth looks like it's been fueled by volumes. As you look out to 2021, do you see room for price to be a lever to pull for sales growth?
No. Regarding pricing, so far this year, the pricing has been rather stable. You're talking about the pricing of the products or the acquisitions? Okay, the product…
Correct. The product pricing.
Yes, it's been rather stable, but we see now that the steel price has started to increase. So that could be the -- one of the reason why our suppliers might increase their selling price. So as a result of that, we should -- if it does happen, and it will certainly happen, I would say, in the course of the next 3 to 4 months. We will have to increase our pricing accordingly as well. So that should not affect the gross margin of Richelieu, if not, maybe temporarily for a few weeks.
Right. Then I guess higher prices would be a positive. So is that -- would it be a…
Yes, that would be our answer. Yes.
Would it be sort of like mid-single digits or something?
We don't know. We don't know yet. I think it could be between 4% and 7%. We don't know yet. And not for all the product. For certain products, mainly the product coming from Asia.
Okay. That's helpful. And then just digging into on the retailer side, the 46% organic growth. How much of that was underlying demand and how much of that was just the timing of the large cyclical customer?
Don't have it with me, the exact figures. It's mainly with the regular customer that we…
Yes. The technical -- I mean, the cyclical sales represent 5% of the 40%. So the rest is the…
Basically, the demand for the regular product that we have in store.
That's it.
Okay. No. That's helpful. And Richard, I was just wondering if you could give us an overview of how you -- where you think your market share stands today across the different categories in Canada and the U.S.? Because it seems like you must be picking up market share this year, and I don't know if that's -- if you would agree with that.
We do -- actually, we -- I think also that we do -- we're capturing more market share because our sales force kept working over the phone contacting customers, and we keep innovating with the products. We are a one-stop shop. And I think we made the right decision in last March that, that decision was to make sure that we don't decrease our purchasing inventory. Even though as a result, those strong sales, you see a decrease in our inventory and the higher turnover of our inventory. But because we were not expecting such an increase with the hardware retailers. So basically, our market share with the retailers for the product that we shared in Canada is probably 70%. And for the manufacturers, I would say around 70%, the same thing in Canada.In the U.S., we're still small. I think in the area where we have been for more than 5 years, our market share is probably 20%. And the other -- the new area, it's about 5%. So that's good news because we can't do nothing but increase those sales in the future. Regarding the retailers in the U.S., we're not even touching the market yet. We're going to sell, what, how much this year, $230 million, mainly thanks to the Mibro acquisition. But Mibro give us a good way to increase our sales in the U.S. because they have more representatives, they service more customers. So the end result of that acquisition in the U.S. regarding the retailer should be very good.
[Operator Instructions] And at this time, Mr. Lord, we have no other questions registered, sir.
So it was a real pleasure to talk to you. So you're welcome to call us on the phone, if you have any more questions, we are at your dispositions. So thank you very much.
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. Enjoy the rest of your day.