Richelieu Hardware Ltd

TSX:RCH

Earnings Call Transcript 2021-Q3

[Operator]

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 on October 7, 2021. [Foreign Language]

[Richard Lord, CEO, President & Executive Director]

[Foreign Language]. Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter and 9-month period ended August 31, 2021. With me is Antoine Auclair, CFO. As usual, note that some of today's issues include forward looking information, which is provided with the usual disclaimer, as reported in our financial filings. In line with previous period this year, we had a strong third quarter and our first 9 months showed solid growth. In Q3, sales grew to $273 million, a 20% increase, and EBITDA margin reached 17.1%. Our year-to-date sales were over $1 billion and EBITDA reached $163 million. We have made every effort to provide our customers with the most effective support, especially in this challenging environment. Our business model is very supportive in challenging situations. We are supported by highly efficient logistics, well adapted to our customers' needs, our multichannel approach and our one-stop Inter-Co Inc. North American network -- or one-stops shop Inter-Co Inc. North American network, all this provides our customers with quick and easy access to our products. With our focus on maintaining right inventories and our comprehensive management strategy, we have been able to offer our customers a unique diversity of products including many alternatives in the wide variety of categories. Furthermore, thanks to our website, our customers can contribute many product applications according to specific needs which is also very valuable in these circumstances. Our manufacturers market performed very well and drove growth in the quarter with internal sales up 23.9%. In Canada, a considerable growth of 35.2% in the U.S. Meanwhile, sales to retailers and individual superstores are now normalized to the prepandemic business level. This strong performance was reflected in our EBITDA margin and net earnings, and we ended the first 9 months with a further strengthened financial position. We remained focused on our acquisition strategy, which is the key component to our short- and long-term growth strategy. We closed 2 acquisitions in the third quarter, Uscan Industrial Fasteners and Inter-Co as previously announced, followed by 2 more after the quarter, Cook Fasteners, screw and bolt distributor operating 1 distribution center in Mississauga, Ontario, serving industrial markets customer. And then industrial Plywood, a panel distributor operating 2 centers in Reading and with -- in Pennsylvania. So far this year, we completed 5 acquisitions that will be adding $75 million of potential annual sales. In addition, we have opened 2 additional distribution centers in the U.S. since the beginning of the year, one in State New York, which is our fifth center in the state. And during the third quarter, we added 1 in Reading, Pennsylvania, taking our network to 97 strategically located locations. I'll now turn to Antoine for the financial review for the period.

[Antoine Auclair, VP & CFO]

Thanks, Richard. Third quarter sales reached $373.3 million, up by 20%, of which 14.1% from internal growth and 5.9% from acquisitions. At comparable exchange rates to last year, sales increase would have been 23.2%. In Canada, sales amounted to $246.2 million, up by 21.3%, of which 12.9% from internal growth and 8.4% from acquisitions. Our sales to manufacturers reached $205.3 million, up by 32.5% of which 23.9% from internal growth and 8.6% from acquisitions. As for the hardware retailers, sales stood at $40.9 million, down 14.8%, returning to prepandemic business level. In the U.S., sales grew to USD 102.1 million, up 26.7%, 25.3% from internal growth and 1.4% from acquisitions. Sales to manufacturers reached $91 million, up 36.7%, 35.3% from internal growth and 1.4% from acquisitions. The hardware retailers and renovation superstores market, sales were down 21.6%. Total sales in the U.S. reached CAD 127.1 million, an increase of 17.5% and representing 34% of total sales. For the first 9 months, sales reached $1.042 billion, up 28.9%, of which 25.1% from internal growth and 3.8% from acquisitions. In Canada, sales reached $687.5 million, up by $172.6 million or 33.5% of which 29% from internal growth and 4.5% from acquisitions. Sales to manufacturers reached $562.6 million, up by $155.4 million or 38.1%. Sales to hardware retailers and renovation superstores reached $124.9 million compared to $107.4 million, up 16.3%. In the U.S., sales amounted to USD 283.4 million, up 30.4%, of which 27.6% from internal growth and 2.8% from acquisitions. They reached CAD 354.8 million, up by 20.7%, accounting for 34% of total sales. Sales to manufacturers totaled $247.3 million, an increase of $63 million or 34.2% of which 30.9% from internal growth and 3.2% from acquisitions. Sales to hardware retailers and renovation superstores were up 9.4% compared to last year. Third quarter EBITDA reached $63.9 million, up $14.9 million or 30.3% over last year, resulting from significant increase in sales and continued control on expenses. Gross margin also improved, and the EBITDA margin stood at 17.1% compared to 15.8% last year. For the first 9 months, EBITDA reached $163.1 million, up 51.3%. As for the EBITDA margin, it stood at 15.6% compared to 13.3% last year. Third quarter net earnings attributable to shareholders totaled $38.7 million, up 35.2%. Net earnings per share were $0.69 basic and diluted compared to $0.51 basis and $0.50 diluted last year, an increase of 35.3% and 38%, respectively. For the first 9 months, net earnings attributable to shareholders reached $97.2 million, up 67.1%. Diluted net earnings per share stood at $1.72 compared to $1.03, up 67%. Third quarter cash flow from operating activities before net change in noncash working cap amounted to $48.6 million or $0.86 per share, an increase of 27.7%, resulting primarily from the net earnings growth. Net change in noncash working capital used cash flow of $14.9 million, in part due to increased inventories resulting from higher demand and to a lesser extent, cost of products. For the first 9 months, they were up 47.3%, totaling $125 million or $2.22 per share. For the third quarter of 2021, financing activities used cash flow of $17.3 million compared to $9.2 million last year. Dividends paid to shareholders of the corporation amounted to $3.9 million compared to $3.8 million in the same period of 2020. We also repurchased common share for an amount of $9.8 million. For the first 9 months, financing activities used cash flow of $39.6 million compared to $19.9 million in 2020. Dividends paid to shareholders amounted to $15.5 million compared to $7.5 million last year. The first quarter of 2021, a special dividend of $0.0667 per share was paid in addition to a quarterly dividend of $0.07 per share. We also repurchased common share for a total amount of $13.1 million in the first nine months of 2021, while no share repurchased in 2020. During the third quarter, we invested $39.6 million, $56.3 million in the first 9 months, of which $44.2 million for the business acquisition and $12.1 million primarily for the purchase of equipment to maintain and improve operational efficiency as well as further investment in IT infrastructure. We continue to benefit from a healthy and solid financial position, cash balance of $66.7 million, almost no debt, a working capital of $416.9 million for a current ratio of 3.31 and an average return on equity of 21.2%. I now turn it over to Richard.

[Richard Lord, CEO, President & Executive Director]

Thank you, Antoine. In conclusion, we would continue to provide the best possible support to our North American customers by relying on our value-added multi-channel service and all the strengths that have contributed to the Richelieu leadership. As mentioned last quarter, we have ongoing expansion projects at some of our U.S. centers such as Detroit, Dallas, Orlando, Boston, Atlanta in anticipation of future growth in the U.S. and in order to better meet demand and provide the best service possible. We will continue to efficiently integrate our recent acquisition, while developing potential synergies. We will seize new acquisition opportunities as long as they are consistent with our objectives, maintaining strict cost control and making optimal news that our resources also remains a priority. We are confident that we will close this year with strong results, maintaining our successful strategies. 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 Capital Markets.

[Hamir Patel]

Richard, could you give us a sense as to how your sales fared in the month of September for manufacturers and retailers.

[Richard Lord, CEO, President & Executive Director]

As mentioned earlier, the safety retailers are down because they normalize. They're getting more close to the prepandemic sales volume. And so -- which is not one in the circumstances, which is being confirmed by the point of sales report that we have from our main customers being the manufacturer sales are very strong. It continues to be very strong. I think people -- what we hear from our sales force actually is that our customers are still very busy and should continue to be busy for a few quarters because actually some projects have been postponed because of inflation, while many projects are still going on. And those projects that are postponed should take place after let's say, more dollar pricing because we -- what we read also is that both in Canada and where the consumers have some money at the bank, and I think it's a smart way to spend their money in investing in the kitchen cabinet, the closet and the project that our customers -- the Richelieu customers can undertake.

[Hamir Patel]

Richard, that's helpful. And I wanted to ask about supply chain, I guess, 2 ways. So it sounds like you're not seeing the supply chain issues that we're seeing globally affecting demand, at least from the manufacturer side. But could you comment on how it's affected your own ability to source product? And has that changed the mix of geographic mix of where you're bringing products from? And maybe if you can just remind us what that mix is today?

[Richard Lord, CEO, President & Executive Director]

The good news, actually, you see while looking at our financial statement that our inventory is increasing. So that's good news. That means that we can get more products coming in. And actually, I think the business -- the Richelieu business model, as mentioned at the beginning of the speech, is very strong, consisting omnichannel in many ways for the customers to reach customers to the web, a quick connection with our sales rep which usually on the road, they're not on the road now, but they might be sitting at home because of the COVID, but they're answering to -- inside one that they can't answer a call whatever the customer has punch the button on the website or give a phone call. And you also have a lot of people supporting our customers over the phone. And all these people, they are product specialists. So it's our customers have one difficulty is acquiring one product. So let's say that one product is not available. Our people, who suggest our customers an alternative product that would do exactly the same job because one of the strength of relationship is to have a plan A, B and C and sometimes B in terms of all the products that we sell. So that gives many opportunity to our customers and also other warehouses are connected together. And we have what we call here an open power policy actually for our customers what were -- wherever you are situated in North America, you need a product. The product is going to come from wherever the product is available to you at our own expense. And this results in strong increase in sales and bottom line, as you can see. So we're quite proud with that strategy, and we're also quite proud of the specialized team that we have and the quick response that we can give to our customers whatever the question is or the problem is.

[Hamir Patel]

And then, Richard, on that note, in the past, I think you previously sort of said 20% of the products come from Asia. Is that still a good number? Or is that a lower number now just given some of the logistics issues?

[Richard Lord, CEO, President & Executive Director]

In terms of dollars, that's still a good number.

[Antoine Auclair, VP & CFO]

20 Asia, 20 Europe and 60 North America or EMEA.

[Hamir Patel]

Perfect. And just a last question for me. Antoine, as you start to plan for 2022, are there any larger capital projects that are worth noting?

[Antoine Auclair, VP & CFO]

Not as we speak. We have -- of course, we have ongoing expansion projects like we discussed in the last quarter, but we're not talking about material investments. So as we speak, it's going to be mainly maintenance CapEx next year for now. Is there something -- if there's something else, we'll tell you?

[Operator]

Next question will be from Meaghen Annett at TD Securities.

[Meaghen Annett, Analyst]

Just looking at the EBITDA margin, very strong again this quarter. Can you just give some color maybe around the cost containment initiatives that might be contributing to that performance? Are there any costs you anticipate to maybe come back as we hopefully continue to manage through the pandemic, things like travel? And is there any color you can give us around your margin expectations for Q4?

[Antoine Auclair, VP & CFO]

Yes. The main contributor for this -- for the EBITDA, Meaghen, is definitely the sales volume. So that's the main factor. In terms of -- we're still very rigid in terms of cost control, that's for sure. Yes, there's a certain portion of the cost cut that should come back over time, like you just said, the travel and living expenses were still very rigid on those. It will come back. It will not come back at the same level of 2019, but it will. Some of these costs will come back. So you might see a bit of pressure on the operational expense, but nothing major there. And when we're going to be coming back to a prepandemic level, the EBITDA could be anywhere between 13.5%, 14%, something around that 13.5% to 14%.

[Meaghen Annett, Analyst]

Okay. Great. And then just looking at the inventory position. So it was a pretty sizable increase there. Can you maybe just talk about the rationale for the magnitude of the increase? And just how you plan to manage that, assuming you continue to see sales at retail tapering off?

[Antoine Auclair, VP & CFO]

Yes. But with the pressure we have on the service level, for sure that we were expecting the inventory to increase. There's also the impact of the acquisitions as well. So those acquisitions doesn't come without inventory. So they increased the inventory levels. Also, the cost increase have an impact. So for 3 major elements of volume, acquisition and cost increase.

[Richard Lord, CEO, President & Executive Director]

And just to mention also that we're slowing down the purchase for the inventory for the retailers, but that only accounts for 18% of our sales. And many of the products that we sell through retailers, we also sell to the manufacturing side of the business. So that will not be a very big material reduction of the inventory because of the retailers.

[Operator]

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

[Zachary Evershed, Analyst]

How long of a tail do you see on the professional market before it also pulls back to prepandemic levels? You mentioned a few quarters given the cost inflation we've seen postponing some projects. Do you have a number in mind?

[Richard Lord, CEO, President & Executive Director]

We ever come back to the prepandemic level, we don't know, but we see initial use market share increasing. I'm quite proud to mention actually that our sales growth in Canada, it's 25%, it's 35% in U.S. dollar in the U.S. So that means that we're capturing more market share. And we also -- actually, we gained many new customers. And we even have a few -- we don't give you, let's say, that we're billing some customers actually that would like to join us that currently would like to join us. So we have to tell them, give us some more time to establish the rate level of inventory, and we will back to you in 3 months or 4 months for now. So I think the primary need actually has been a springboard for Richelieu in order to gain new customers and increase its sales to their current customers. So this is very positive. And with the -- we also have the acquisition as a matter of fact. But if we come back to the essence of your question, actually, we expect the quarter, the current quarter to be as strong as the one that you have just seen. The first quarter of next year, if you remember well, the growth was not that outstanding in the first quarter of last year, so they want to be strong. After that, what we should see is, I would say, the sales in dollar being at the level that we see now plus inflation, at least new month -- So that will be probably the second, the third and the fourth quarter of next year. This is what we expect, while the sales to Ada retailers should be in the same pattern that we see now to the prepandemic level, which is still very good numbers. So basically, this is as far as we can see what we can explain to you.

[Zachary Evershed, Analyst]

That makes sense. And then your inventories ticked up, which is good. But would you say that you're having any difficulty sourcing certain products? And is that constraining your organic growth in any areas?

[Richard Lord, CEO, President & Executive Director]

We have the difficulties like anybody else, but I think we success first of all, we have made -- the first decision that we made at the beginning of the peak is not to slow down our fiction inventory. So that has put us in advance compared to our competitors. And in spite of the difficulties to get the products on time and the extra, we have not hesitated to pay extra costs for getting the merchandise from Asia, for example, from Europe. So we've paid containers up to $25,000, and we've paid airfreight. I would say most of our competitors would refuse to pay those amounts because they will -- they would say, "Hey, we kind of have a container that's $12,000, but the -- that will delay the delivery for 3 months. I appreciate you we made the decision on the spot. Yes, we're benefited to beat the $25,000 and the $20,000, and we're going to get the inventory earlier. So and those extra costs are not part of the cost of our products. We have not increased our selling price because of those, I would say, outstanding costs out of a new old cost for bringing the containers in their freight. So we have absorbed so far this year for $5 million, which is included in our expenses and as that bends as the cost of inventory have not been concerned for increasing our pricing because it does increase the cost of our product because we will -- these are decisions that we've made, consider in order to make sure that we have our products as early as we can in order to satisfy our customers.

[Zachary Evershed, Analyst]

Got you. And then could you just compare and contrast? You have this open bar policy where no matter where it is in the country, your customers will get it and CH will absorb that cost and you have RCH absorbing the cost for higher-priced containers and airfreight as well. But then you have these fantastic margins reported in the quarter from cost containment and higher gross margins. So how long do you think you can drive that?

[Richard Lord, CEO, President & Executive Director]

As long as that is -- we have to do it -- I focus we need to do it. But I don't know what will happen in the months to come, but I don't want to make any philosophy here, but -- What we see actually, we see when we read the report for Lowe's and Depot as well out in the U.S., I think their sales is all back to the prepandemic level. So basically, that should spare some containers and ship to get ethane for other customers in North America. Hopefully, that will -- that should and that should happen probably after the Chinese New Year regarding New Year.

[Zachary Evershed, Analyst]

Great color. And just 1 last 1 for me. The acquisition pipeline. How is it shaping up for the rest of the year and for 2022. And with the Pennsylvania acquisition expanding your panel offering -- Do you see any major acquisition opportunities in similar markets?

[Richard Lord, CEO, President & Executive Director]

Yes. It's still very healthy. So we've concluded 5 acquisitions this year. The pipeline is very interesting, either in Canada and the U.S. And the acquisition in Reading is a good 1 for us. And yes, it's going to open for other opportunities as well. So we're working on very interesting opportunities.

[Operator]

Thank you. And at this time, Richard Lord, we have no further questions. Please proceed.

[Richard Lord, CEO, President & Executive Director]

Okay. There is no more question. Thanks again for attending. We'll be happy to talk to you if you need to. So have a nice day.

[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 ask that you please disconnect your lines.