Richelieu Hardware Ltd

TSX:RCH

Earnings Call Analysis

Richelieu Hardware Reports Moderate Sales Growth Amidst Margin Pressures

In Q3, Richelieu Hardware achieved $407 million in sales, reflecting a modest increase of 1.9% driven primarily by acquisitions. Notably, U.S. sales rose 4.8% to $148 million, while Canadian sales declined by 2%. The EBITDA fell to $53 million, down 13.2% year-over-year, pushing margins to 11.3%. Net earnings dropped 23.9% to $22.7 million, resulting in a diluted EPS of $0.41. Looking forward, the company is targeting an average of $100 million in revenue from acquisitions annually and expects market recovery to enhance margins in 2025. Immediate challenges persist, but management remains optimistic about future growth prospects in a constrained housing market.

Sales Growth Amid Challenges

In the third quarter, Richelieu Hardware reported sales of $407 million, reflecting a modest growth of 1.9% compared to the previous year. This increase was partially driven by acquisitions contributing 3.2%, despite an internal sales decline of 1.3%. The company's performance varied by region: Canada saw sales drop by 2% to $265 million, while the U.S. experienced stronger growth, with sales up 4.8% to USD 148 million, largely fueled by a 7.5% increase in sales to manufacturers.

Pressure on Margins

Despite achieving sales growth, Richelieu faced significant pressure on its EBITDA margins, which fell to 11.3% from 13.3% year-over-year. The third-quarter EBITDA amounted to $53 million, down from $61 million, indicating a 13.2% decline. Factors such as high inventory costs, product price reductions, and operational expenses related to expansion initiatives were highlighted as contributing to this margin pressure. For the first nine months, EBITDA also declined 14.2% with a margin of 10.9%, down from 12.9% last year.

Declining Net Earnings

The company's net earnings attributable to shareholders in the third quarter dropped to $22.7 million, a decline of 23.9% compared to the previous year. This decline in profitability was attributed to increased amortization expenses linked to new business acquisitions and ongoing expansion projects. Earnings per share were reported at $0.41, down from $0.53 last year.

Ongoing Investment Strategy

Richelieu continues to pursue an aggressive acquisition strategy, with plans for four new acquisitions—two in Canada and two in the U.S. The management expressed confidence in the growth potential driven by a housing shortage in North America and an anticipated recovery in the renovations and repairs market. This optimism reflects a strategic focus on capitalizing on market opportunities.

Strong Cash Flow and Operating Position

On the cash flow front, Richelieu generated $42.7 million from operating activities in the third quarter, compared to $49.8 million in the same period last year. Despite lower cash flow, the company is maintaining a solid financial position, evidenced by a working capital of $632 million and a strong current ratio of 3.5:1, with minimal debt.

Future Outlook and Expectations

Looking ahead, management anticipates a gradual improvement in margins as they expect to ease operational pressures from modernization and expansion costs by early next year. Additionally, they foresee potential price adjustments from suppliers in North America due to rising operational costs, which could influence margins positively in the longer term. However, challenges remain in the retailer segment, where sales have declined significantly alongside market demand.

Earnings Call Transcript 2024-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 10, 2024. [Foreign Language]

[Richard Lord, executive]

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter and first 9 months ended August 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. Overall, we had a good third quarter where we achieved sales growth and maintain a healthy and solid financial position, considering the soft demand in the R&R and the new housing market.

Total sales growth for the quarter reached 1.9%, partially fueled by our strong performance in the U.S. manufacturers market where sales increased by 7.5% in U.S. dollar, driven by the significant impact of our acquisitions. As for the retailer and renovation superstore market, we continue to see lower sales compared to last year, mainly due to the price deflation and lower demand in this market. Our margins continue to be under pressure from temporary factors, as it was the case in previous quarters. Notably, the charge of inventory purchased at higher than current costs, lower selling prices for certain products and operating expenses related to our expansion projects.

During the quarter, we pursued our network optimization initiative by consolidating 2 of our new centers -- of our centers in the New York area and on the West Coast of Florida.

I'll now hand it over to Antoine for the financial review of the quarter.

[Antoine Auclair, executive]

Thanks, Richard. In the third quarter, sales reached $407 million, up 1.9%. This growth was driven by a positive contribution from acquisition of 3.2%, partially offset by an internal decrease of 1.3%. In Canada, sales totaled $265 million, down 2%. This decline was mainly due to a 3.5% internal decrease, partially offset by a 1.5% positive contribution from acquisitions. Sales to manufacturers amounted to $222 million, up 0.5%, while sales to hardware retailers stood at $43 million, down 13.4%. In the U.S., sales grew to USD 148 million, up 4.8%. Sales to manufacturers reached $141 million, up 7.5%. In the hardware retailers and renovation superstore market, sales reached $7.1 million, down $3.1 million.

In Canadian dollar, total sales in the U.S. reached CAD 203 million, an increase of 7.5%. For the first 9 months, total sales reached $1.4 billion, up 1.6%, of which 0.8% resulted from internal decrease, offset by 2.4% contribution from acquisitions. In Canada, sales reached $773 million, slightly down by 1%. This was driven by a 2.7% internal decrease, partially offset by a 1.7% contribution from acquisitions. Sales to manufacturers totaled $642 million, up $5.3 million or 0.8%. Sales to hardware retailers and renovation superstores were $131 million compared to $143.9 million, down 9%. In the U.S., sales amounted to USD 429 million, up 4.3% with 0.9% attributable to internal growth and 3.4% from acquisitions. They reached CAD 583 million, up 5.3%, accounting for 43% of total sales. In U.S. dollar sales to manufacturers totaled $405 million, an increase of $23.4 million or 6.1%, driven by 2.5% internal growth and 3.6% from acquisitions. Sales to hardware retailers and renovation superstores were down 19.7% compared to last year.

Third quarter EBITDA reached $53 million, down $8 million or 13.2% over last year. Gross and EBITDA margin remained under pressure due to temporary factors, including inventories at higher than current purchasing costs, lower selling prices for certain products, primarily sourced from Asia, and the temporary impacts of consolidation and expansion initiatives. Consequently, the EBITDA margin stood at 11.3% compared to 13.3% last year. For the first 9 months, EBITDA totaled $147.2 million, down 14.2% with the EBITDA margin at 10.9% compared to 12.9% last year. Net earnings attributable to shareholders in the third quarter amounted to $22.7 million, down 23.9%, mainly due to amortization associated with new business acquisitions and expansion projects.

Net earnings per share were $0.41 compared to $0.53 last year, a decrease of 22.6%. For the first 9 months, net earnings attributable to shareholders reached $61.4 million down 26%. Diluted net earnings per share stood at $1.09 compared to $1.47 last year. Cash flow from operating activities before net change in noncash working capital were $42.7 million compared to $49.8 million last year. The net change in noncash working cap items generated cash flow of $7.5 million.

As a result, operating activities provided a cash inflow of $50.2 million in the quarter compared to a cash inflow of $104.8 million in 2023. For the first 9 months, cash flows from operating activities represented a cash inflow of $106.4 million compared to a cash inflow of $198 million last year. For the third quarter, financing activities used cash flow of $18.4 million compared to $18.2 million last year. During the quarter, we paid lease obligation of $10.5 million and distributed dividends of $8.4 million. For the first 9 months, financing activities used cash flow of $76.1 million compared to $58 million in 2023 with the variance primarily attributable to common share repurchase amounted to $18.6 million this year compared to $800,000 last year.

In the first 9 months, we invested $42.4 million, including $17.6 million for 3 business acquisitions and $25.4 million, primarily for investments related to our consolidation and expansion projects, including our new Calgary location and the purchase of equipment to maintain and improve operational efficiency. We continue to maintain a solid financial position with working capital of $632 million and a current ratio of 3.5:1 while holding almost no debt.

I now turn it over to Richard.

[Richard Lord, executive]

Thank you, Antoine. We are pursuing our acquisition strategy as we signed agreement in principle in the third quarter in view -- of 4 new acquisitions, 2 in Canada, and 2 in the U.S. We feel confident about achieving good future performance considering that the current housing shortage in North America is offering a great potential of growth of Richelieu and that the R&R market is expected to recover in the coming months. We are committed to seize this opportunity. We benefit from a strong positioning with a robust network, unmatched offering expert team, outstanding website, a distinctive service appreciated by our customers in our diversified segment. And we have a solid innovative drive in all the growth sector of residential and commercial innovation.

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, analyst]

Richard, if you're successful in completing those 4 acquisitions, would you expect that to be completed in the fourth fiscal quarter? And what would be the total revenues associated with the 4 deals?

[Richard Lord, executive]

Yes, it will be settled before the end of the third quarter. And Antoine, just to have a precise number of the...

[Antoine Auclair, executive]

Yes, before the end of the fourth quarter or slightly after that, but definitely in -- in 2024. And we're talking about adding $40 million to the $60 million that we've already completed at the beginning of the year.

[Hamir Patel, analyst]

Okay. Great. And would that be largely on the manufacturer side?

[Antoine Auclair, executive]

Yes.

[Hamir Patel, analyst]

Okay. And then, Richard, are you able to give an indication of how sales fared in the month of September?

[Richard Lord, executive]

Yes. In the month of September, as we already have discussed during our last meetings in Montreal, basically, the month of September has been the same trend that we have seen in the past. And we see the trend, for example, with the kitchen cabinet manufacturer to be a slight increase in this market. The commercial woodworking industry is doing well with an increase of 6%. And we have other specialized markets, which is anything else, an increase of 1%. And all the other markets have a slight decrease of something like 2.5% to 3%.

Basically, we don't see a sign of recovery yet, but we're certain that in the coming months, the market will certainly improve. And Richelieu is now working with its team to make the budget for the next year. And many of our people are very positive about what will happen in the market. We just hope that this thing will materialize. But there's no doubt in our mind, the market will have to improve. The question is only when.

[Hamir Patel, analyst]

Okay. Fair enough. And Richard, I know the margins kind of troughed in Q1. You had a improvement in Q2 and Q3. How do we think about just given it sounds like near term, things are still a bit sluggish. Would you expect any margin improvement in Q4 and how do you think about maybe where full year margins could go in '25?

[Antoine Auclair, executive]

Yes. It's Antoine -- slight improvement. To change the margin materially, we would need to see a recovery in the market. So we're in distribution. So top line, additional sales goes down the bottom line very quickly. Same thing if there's a reduction in sales. But in a market -- in a better market, where you will see the margin improving. If not, there are a few things we're doing like improving our expansion projects and those projects we have ongoing. So this will improve the EBITDA, but not materially if the margin, if the market does not recover.

[Operator]

Next question will be from Zachary Evershed at National Bank Financial.

[Zachary Evershed, analyst]

Good afternoon, everyone. How consistently do you think you can add $100 million in run rate revenue through acquisitions? Do you think that's an average target or an annual minimum going forward?

[Richard Lord, executive]

This is an average target. We have to -- the plan that we have. This is what we would like to achieve. If 1 year, we make only $50 million, the next year, we're going to have to make $150 million. So basically, average for the next 5 years should be around $100 million, which is quite possible. And we see the portfolio of potential acquisition that we have in our hands. As we speak, we just said that we have a principle -- agreement in principle for 4, but there are other coming shown as well. The timing seems to be pretty good.

[Zachary Evershed, analyst]

Good color. And then the U.S. customer lost in Q2. How is it going on backfilling those volumes?

[Richard Lord, executive]

Well, we're getting some sales from other customers. Just to explain that was low. We had -- we were supplying them with hinges on slide with the Richelieu's and Blum name, for example, I have decided to have their own brand names importing from China. I don't think it's a good move for them because the people when they replace their hinges or slide into the kitchen cabinet, it's only printed Blum of Richelieu on to the slide because we both together, I think we have something like 80% of the market. So -- but that's the decision we have to respect that. And we have to find sales with other customers, which we're doing with customers like [ Tractor ] Supply, for example, that we have good commitment from them that we're going to see our sales increasing for the next -- in the next quarters as well.

Basically, we should get that business back from other customers. And and we have to sell more to the retailer market in the U.S. where we have to refine our plan. We have to -- we would like to make an acquisition in this packet as well. Eventually, that will happen.

[Zachary Evershed, analyst]

Understood. And on the topic of Blum, you mentioned that they were pushing for a price hike last quarter. How well is that flowing through so far? And are you seeing other suppliers start to follow suit?

[Richard Lord, executive]

No, we don't see that, but that's going to happen because the suppliers that are not from Asia they have to increase their cost by -- the rents are increasing, the salary increasing. So basically, I think this is obvious that eventually that all the suppliers, the North American and the European suppliers will have to increase their price again. And that does not apply to Asia though, because Asia, we thought we -- the communication that we have with our suppliers in Asia is that they don't have much to do. So they're quite willing, they give us better price though. So that -- this is -- we improve the margin for the future. But they don't have much to do. So we don't see them we don't see that they will increase their price shortly.

[Zachary Evershed, analyst]

Understood. And just a last one for me. When do you think we start to get out from under the modernization and expansion costs?

[Antoine Auclair, executive]

I would say early next year, Zach.

[Operator]

[Operator Instructions] And at this time, Mr. Lord, we have no other questions registered. Please proceed.

[Richard Lord, executive]

Okay. Thanks, everyone. Now we would be happy to answer your question. Hello? Hello...

[Operator]

Mr. Lord.

[Richard Lord, executive]

Yes.

[Operator]

We have no other questions at this time, sir.

[Antoine Auclair, executive]

Sorry no, that's fine. And thanks a lot for attending. And if you have any questions, you can give us a call.

[Richard Lord, executive]

Yes, I have to apologise. I received a phone call. So I have to answer immediately, so it took 10 seconds, but timing was not good for you. So I apologize, yes.

[Operator]

Thank you, gentlemen. This does 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.