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Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Fourth Quarter Results Conference Call. [Operator Instructions] Note that this call is being recorded on Thursday, January 23, 2020.[Foreign Language]
[Foreign Language] Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the fourth quarter and 12-month period ended November 30, 2019. 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.The fourth quarter benefited from the impact of our acquisitions completed in Canada during the year. This new acquisition has a good potential and they expand our reach in some specialized markets. Combined with our market development and innovation strategies, they contributed to generate sales growth of 2.4%, which is welcome, given the slowdown, especially in Western Canada and the challenges we were facing with the hardware retailers.These acquisitions contributed well to our performance in the manufacturers market. But in the retailers market, sales were down due to the condition we explained in previous quarter, mainly store closure and inventory realignments of some of our retailers customers -- retailing customers.Cyclical sales were also lower in the fourth quarter. It has to be noted that our EBITDA margin continued to improve during the period, reaching 11.8%. Thanks to rigorous control of gross margin, operating and freight costs. EBITDA for the quarter increased by 6.8% and net earnings by 5.6%.I'll now ask Antoine to go through the financial highlights on the fourth quarter and fiscal 2019, and then we'll come back with additional comments. Antoine?
Thanks, Richard. Fourth quarter sales reached $265 million, up by 2.4%. Sales to manufacturers stood at $233.5 million, up by 4%, 0.6% from internal growth and 3.4% from acquisition.In the hardware retailers and renovation superstore market, we achieved sales of $31.5 million, down by 8.2%.In Canada, sales amounted to $179 million, an increase of $4.1 million. Our sales to manufacturers reached $150.4 million, up by 4%. As for the hardware retailers and renovation superstores market, sales stood at $28.6 million, down by 5.6%. The general slowdown felt in this market during the first quarters of fiscal 2019 continue to have a downward effect on sales in the fourth quarter.In the U.S., sales totaled USD 65 million, up by 1.4%, resulting from internal growth. Sales to manufacturers reached USD 62.8 million, up by 2.8%.In the hardware retailers and renovation superstores market, sales were down 26.7% for the quarter, mainly caused by lower cyclical sales, but are up 4.8% for fiscal 2019.Total sales in the U.S. reached CAD 86 million, an increase of 2.5%, representing 32.4% of our total sales. Total sales in 2019 reached $1.042 billion, up by 3.7%, 0.1% from internal growth and 3.6% from acquisitions.Sales to manufacturers reached $898 million, up by 5.5%, 1.2% from internal growth and 4.3% from acquisitions.Sales to hardware retailers and renovation superstores stood at $143.8 million, down by 6.1%.In Canada, sales totaled $685.7 million, up by 1.1%, of which 3.2% from acquisitions and 2.1% from internal decrease.Our sales to manufacturers amounted to $568 million, up by 3.4%, of which 3.9% resulting from acquisition and 0.5% from internal decrease. Sales to hardware retailers and renovation superstores were $129 million, down by 8.8%. The slowdown in this market, mainly in the first half as well as the closure of several stores of our major customers impacted sales downwards.In the U.S., sales amounted to USD 267.8 million, up by 6%, 1.6% from internal growth and 4.4% from acquisitions. They reached CAD 356 million, up by 9.2%, accounting for 34% of our total sales.Sales to manufacturers reached USD 248.1 million, an increase of 6.1%, of which 4.7% from acquisition and 1.4% from internal growth.As reported in previous quarters, the internal growth in the manufacturers' market was affected in the first quarter by the termination of a supply agreement with a major customer. At comparable sales level, internal growth in this market would have been 3.2%.Sales in the hardware retailers and renovation superstores market were up 4.8% in U.S. dollar.Fourth quarter EBITDA stood at $31.2 million compared with $29.2 million last year. EBITDA margin stood at 11.8% compared with 11.3% for the fourth quarter of 2018, resulting from improvements in gross margin and operating costs.For the year, EBITDA was $109.5 million, up by 3.3%. Gross margin and EBITDA margin remained stable with 2018.Fourth quarter net earnings attributable to shareholders totaled $19.5 million compared with $18.5 million last year.Net earnings per share reached $0.34 basic and diluted compared with $0.32 for the same quarter last year, an increase of 6.3%.For the year, net earnings attributable to shareholders reached $67.5 million. Net earnings per share were $1.18 diluted, up by 0.9%.Fourth quarter cash flows from operating activities before net change in noncash working capital balances were up by 6.9% to $24.8 million or $0.43 per share. Net change in noncash working capital balances represented a cash inflow of $7.9 million. For the year, they were up 2.3%, totaling $86 million or $1.50 per share. Net change in noncash working capital balance represented a cash inflow of $2.4 million, while $41.5 million of cash flow was used in 2018.During the year, we paid dividends of $14.4 million, of which $3.6 million were in the fourth quarter and repurchased common share for $25.2 million. We have, thus, distributed a total of $39.6 million to our shareholders this year.We also invested $31.3 million during the year, of which $20.8 million was for business acquisitions and $10.6 million for equipment to maintain and improve operational efficiency and for IT equipment.As at November 30, 2019, cash totaled $24.7 million, and our working capital was $250 million for a current ratio of 4.7:1.I'll now turn it over to Richard.
Thank you, Antoine. 2019 was a very active year. We continued our efforts to expand and develop markets, which included strengthening our presence in specialized market through our recent acquisitions, such as door and window hardware, architectural hardware for stair and railing, including standard steel and glass.Under our innovation strategy, we continue to broaden and diversify our product offerings to stay ahead of trend. In early December, we opened a new distribution center in Mount Laurel, a suburb of Philadelphia. This new center houses a wide range of premium decorative panels for this region.The implementation of our new center in New York is well underway. We anticipate that the official opening of the showroom will hopefully take place before the end of the second quarter. This key location with a state of the art showroom for our customers and the New York community of architects and designers is designed to serve as a friendly workspace where they can obtain detail and complete information about Richelieu's products and services.We continue to improve our operational efficiency and customer service. We manage our supply chain, taking advantage of the best practices and technologies in order to minimize costs and maximize customer satisfaction. Our highly effective and reliable AutoStore system is now expanding.We further invest in richelieu.com, which is used extensively by our customers in both Canada and the U.S. Our online sales are growing and now reach about 39% of our sales in Canada and 28% in the U.S.We are pleased to have started fiscal 2020 with 2 new acquisitions. On December 9, 2019, we acquired Decotec, a distributor of decorative panels and related products with a distribution center in the Toronto suburb of North York.And Mibro, a distributor of hardware products and power tool accessories for the retailers market. Mibro has been the leader in its field for over 65 years and serves a wide range of customers in Canada and in the U.S. from 2 distribution centers located in Toronto and Buffalo. The integration of Mibro enables us to broaden our offer to hardware retailers, both in Canada and in the U.S., where the annual sales are approximately USD 15 million.This also reinforces our sales force and product management team in this market. We already started our integration process and will take necessary action in order to gradually improve the profitability and take it to an acceptable level as per Richelieu standards.Combined with the 4 acquisitions completed in fiscal 2019, they add approximately $17 million in annual sales. We also recently signed an agreement in principle to acquire a U.S. distributor operating in new strategic regions for Richelieu. This transaction should generate additional sales of approximately USD 15 million on an annual basis. Our strong network now includes 80 centers, 43 in Canada and 37 in the U.S.In 2020, we will remain focused on innovation, outstanding customer service, market share gain in Canada and in the U.S., new synergies, both operational efficiency and profitability and new acquisition opportunity. The result would be to continue to create long-term value for Richelieu and its shareholders.Thanks, everyone. We'll now be happy to answer your questions.
[Operator Instructions] And your first question will be from Hamir Patel at CIBC.
Richard, could you -- for the acquisitions that are expected to close in Q1 that you've already announced, the $40 million that has closed and the sort of USD 15 million of sales under the agreement. What's the purchase price associated with those 3 transactions?
So it's around $20 million, $23 million, Hamir. And I'm talking about the 2 acquisitions closed in December.
Okay. And what about the one in principle? Is there a figure for that one yet?
It's too early to talk about that.
Okay, fair enough. And Richard, you referenced for the one under the agreement in principle that it's going to expand Richelieu into new strategic region. Any more color you can give on which part of the U.S. or North America that expansion is going to take place?
I think this is according to our strategy in the U.S. to continue our market penetration to get new DCs in new regions where we can expand our product offering and increase our sales and create more value for Richelieu in the long term as well by expanding our network in this country. And that should continue on for the year, the months to come as well but with the same strategy.
Okay. So that is sort of U.S. South, U.S. West? Anything...
It's hard to tell because it's a very small market. If I tell where it is, the competitors, and since this is very confidential, that will be easy for people to guess who we're talking about in the U.S. market.
Okay. Fair enough. And then...
Yes. Sorry about that.
That's okay. Final one for me for now. The retailer market for Canada and the U.S., when would you expect each region to get back to positive comps?
We don't think the -- for the next 2 quarters, this market will be positive for Richelieu, both in Canada and the U.S., but with the acquisition of Mibro, we are well, not only expanding, creating -- I think we're going to develop -- almost develop our sales to the hardware retailers in the U.S. and also, we -- a new sales team is joining us that is very active in the U.S. as well as in Canada. And we expect in the months to come, some very, very good synergies in terms of increasing our sales in both countries, using the sales forces that we both have and combining the best that we can.So basically, we're happy about that acquisition for the good value it does represent for Richelieu for the midterm and the long term.
[Operator Instructions] And your next question will be from Zack Evershed at National Bank.
Congrats on the quarter, especially the margin improvement and year-over-year, that's 3 straight quarters now. Can you tell us a little bit about which initiatives are helping out with improving gross margins and reducing operational costs?
Actually, we have a tight control over the gross margin. So it's been the -- it's always been tight. But this year, we've paid special attention for the timing of the price revision when they have to be revised. Regarding the expenses, before acquisition, we have decreased slightly, very slightly our operating expenses in North America. And regarding the freight costs, we have -- as I have mentioned last year and a few times during the course of last year as well, is that we have established a tight control, and we have a -- not only we have stabilized, but we have slightly decreased -- as a percentage of our sales, we have slightly decreased the cost of the freight, and we continue to work on that.I think the cost of the freight is a major issue for all companies in the world. So basically, that does remain a very important item for us to keep an eye on. So we're happy with the end result, that is an increase in our EBITDA margin.
That's great color. Do you think 12% EBITDA margins are achievable over the next couple of years, given your current infrastructure and geographic network?
Everything could be achievable. But if we look at the long term, we have to make sure that we remain reasonable with our pricing that our marketing strategy is sound with what we've done and what we -- our customers have expected.But we believe pretty much, it's a top priority for Richelieu to maintain our margin. And I cannot commit to 12%, but we know we -- we have that in mind too.
Beautiful. And then moving on to organic growth. Still quite weak there. And that's lapping a soft Q4 last year. You mentioned that retailer sales won't hit positive comps for maybe 2 quarters. But what can you tell us about your view on internal growth in 2020 for the company as a whole?
It's hard to tell. I think we have aggressive -- we have an aggressive plan. At Richelieu, we expect to have a growth -- a reasonable growth. I cannot commit on any number, but that's our goal.Regarding the hardware retailers, basically, that's something which is out of our control. You know that one of our big customers is closing 34 more stores. They're actually doing that at this time. So it does create some -- which is on sales decrease for a while in the retailer market.In the long term, it does not change anything for us because we sell to all the customers in Canada, so sales would go somewhere else. But for the time being, this big customer doesn't buy and Richelieu sold the inventory in other stores. So that's affect the market.We all show a -- I was reading in the paper disclosing that Mr. Poloz was talking yesterday or the day before to the market, and I think now they realize that the Canada -- it's all over Canada, the retail sales are difficult since a few months. So this is what we see with our customers. Mainly -- we've seen that mainly for the first 2 quarters of the last year. And the last 2 quarters were a little bit better, but it's not what we used to see. Anyways, we just hope that things will improve over the months. But for the next 2 quarters, we don't expect anything positive with the retailers. Regarding the manufacturers, we see now that Western Canada is getting worse. This is what we see in the last month and the month before. And the Quebec should remain stable as well as Ontario, but Western Canada is going to affect our sales in total that we take, I think, an important decrease of the sales.We're talking here about maybe 10% decrease, something like that. So even though we do not represent the high percentage of our sales. At the end, it does have an impact. So that's something that we did.But in the U.S., we expect to have a good year. We have a good start in the U.S. for the beginning of this new year, and we expect to have a decent growth for the whole year for the manufacturers. For the retailers, the forecast is a little bit more difficult. It's going to be very positive because of Mibro. But for the rest of the market, I think the basic market that we have should be -- will be positive. But the cyclical sales with the big -- the store that we're talking about here, we never know from 1 quarter to the other, what's going to happen.
That's extremely helpful. And then just one last point for me. The acquisitions. Very busy with Decotec and Mibro, how long have you been working on those ones?
Mibro was that -- something that has been opened about 10 years ago here. So we have opened and closed the file for a couple of times before. Finally, we've got a deal and we think it's a very interesting fit for Richelieu. We're happy that it's done now. Decotec has been very quick. I think we knew -- what, it took a month or 1.5 months?
Yes.
Okay. So then how is the pipeline looking going forward? Do you have anything maybe the size of another Mibro or maybe a Weston that you're looking to get across the finish line?
No. It's still -- there's the one in the U.S. The pipeline is still healthy in Canada and also in the U.S. and it's -- we're talking about pretty much the same kind of profile of company that we've acquired. So we have nice things in front of us.
[Operator Instructions] Next question is a follow-up from Hamir Patel.
Richard, you referenced the Western Canada manufacturer sales could be down. I think you said 10% in 2020. What percent of your manufacturer sales is Western Canada, again?
Well, it's 6% or 7% of our sales, Antoine?
Yes, it's slightly higher than that. It's around 10%.
For the sales to manufacturers?
Sales to manufacturers.
Okay.
Okay. Great, that's helpful. And Richard, you also referenced, I think, some sort of the order store continuing to expand. So how do we think about CapEx for 2020?
CapEx will be similar to 2019. And so between $10 million and $11 million.
The AutoStore deal -- new investment is not very high because we already have made all the software that was exacerbated with the additional AutoStore here.So really, what we have to do is really to get the space and build the module that has to be built in order to install the expansion, but we don't have any software expenses. And whatever, IT -- many IT people involved in that type of thing. So that should be an easy one.
Great. And next one. I know we're probably not going to get the MD&A for a few weeks, but how do we think about, Q1 will be your first quarter under IFRS 16. So what sort of EBITDA impact and lease liabilities should we be factoring in?
Yes. We're still -- we're going to be finalizing the Q1 impact, but we're talking about close to $70 million of addition on the asset side and our liability as well. And in terms of potential impact on the bottom line, it's -- for 2019, it's around $1 million lower profits for 2019. So we'll see for Q1 and 2020. But that's the impact on 2019.
Sorry, and then the sort of EBITDA impacts for?
Okay. The EBITDA impact, it's around $15 million.
1-5? Okay.
1-5, yes. $15 million increase in EBITDA and an impact on the amortization and interest.
And at this time, Mr. Lord, we have no other questions. So I would like to turn the call back over to you, sir.
So thank you very much, everyone. We'll be happy to receive your phone calls, if you have any further questions. Thank you very much. Have a good afternoon.
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 do ask that you please disconnect your lines. Enjoy the rest of your day.