Richelieu Hardware Ltd

TSX:RCH

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Fourth Quarter Results Conference Call. [Operator Instructions] This call is being recorded on January 21, 2021.[Foreign Language]

[Richard Lord, CEO, President & Executive Director]

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu conference call for the fourth quarter and 12-month period ended November 30, 2020. 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 was another period of high profitability and strong increase in sales resulting both from internal and growth and acquisitions -- internal growth and acquisition.Let's take a quick look at the Q4 financial highlights. Total sales increased by 20.4%, including 12% from organic growth and 8.4% from acquisitions. Sales to manufacturers were up 15.7%.Sales rose by 55.4% in the retailers and the renovation superstores market. I'll also point out a 33.5% increase in EBITDA for the year, totaling $150 million or 13.7% as -- and 41.2% increase in net earnings per share, reaching $1.50 compared to $1.16 last year.These results as an essential service of either were achieved, thanks to our business model and strategies which continue to prove their efficiency, mainly our one-stop approach for the service, our innovation strategy, our market diversification, our acquisition strategy which made a good contribution to the results for the quarter and whole year.5 acquisitions were completed in fiscal 2020, adding over $70 million in annual sales; rigorous cost control; and finally, the support and dedication of our team. Under the circumstances, we are very satisfied with the results for fiscal 2020, which shows we have spared no effort to continue to provide maximum support to our customers with care and quality. Antoine will now review the fourth quarter and fiscal year results and the financial position as of November 30, 2020.

[Antoine Auclair, VP & CFO]

Thanks, Richard. Fourth quarter sales reached $319 million, up by 20.4%. Sales to manufacturers stood at $270.2 million, up by 15.7%, 9.8% from internal growth and 5.9% from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of $48.8 million, up by 55.4%, of which 28.5% resulting from internal growth and 26.9% from acquisitions.In Canada, sales amounted to $215 million, an increase of $35.9 million. Our sales to manufacturers reached $174.5 million, up by 15.8%. As for the hardware retailers and renovation superstores market, sales stood at $40.5 million, up by 42.6%.In the U.S., sales totaled USD 78.9 million, up 21.6%, of which 6.9% resulting from internal growth and 14.7% from acquisitions. Sales to manufacturers reached USD 72.6 million, up by 15.8%. In the hardware retailers and renovation superstores market, sales were up USD 4.1 million or 186% for the quarter, resulting mainly from acquisitions. Total sales in the U.S. reached CAD 104 million, an increase of 21.1%, representing 32.6% of total sales.Total sales in 2020 reached $1.128 billion, up by 8.3%, 0.7% from internal growth and 7.6% from acquisitions. Sales to manufacturers reached $938 million, up by 4.5%, 5.4% from acquisition and 0.9% from internal decrease resulting from the slowdown in the second quarter due to the pandemic. Sales to hardware retailers and renovation superstores stood at $189.7 million, up by 32.2%, 10.2% from internal growth and 22% from acquisitions.In Canada, sales totaled $730 million, up by 6.4%, of which 5% from acquisition and 1.4% from internal growth. Our sales to manufacturers amounted to $581 million, up by 2.1%, of which 4.1% resulting from acquisitions and 2% from internal decrease. Sales to hardware retailers and renovation superstores were $117 million, up by 27%.In the U.S., sales amounted to USD 296.3 million, up by 10.8%, 12.6% from acquisition and 1.9% from internal decrease. They reached CAD 397.9 million, up by 11.9%, accounting for 35% of total sales. Sales to manufacturers reached USD 265.9 million, an increase of 7.3%, entirely from acquisition. Sales in the hardware retailers and renovation superstores market were up by 53.5% in U.S. dollars.Fourth quarter EBITDA stood at $46.7 million compared with $35 million last year, up 33.5%. The EBITDA margin stood at 14.6% compared with 13.2% for the fourth quarter of 2019, resulting from increased sales together with cost reduction measures implemented. For the year, EBITDA was $154.5 million, up by 24.4%. Gross margin remained stable with 2019. EBITDA margin stood at 13.7% compared with 11.9%, resulting from increased sales as well as cost reduction measures and government grants.Fourth quarter net earnings attributable to shareholders totaled $27.1 million compared with $19.1 million last year. Net earnings per share reached $0.48 basic and diluted compared with $0.34 for the same quarter last year, an increase of 41.2%. For the year, net earnings attributable to shareholders reached $85.2 million. Net earnings per share were $1.50 diluted, up by 29.3%.Fourth quarter cash flow from operating activities before net change in noncash working capital balances were up by 29.5% to $36.2 million or $0.64 per share. Net change in noncash working capital balances used cash flow of $2.7 million. For the year, they were up 23.5%, totaling $121 million or $2.14 per share. Net change in noncash working capital balances represented a cash inflow of $24.6 million.During the year, we paid dividends of $11.3 million, of which $3.8 million were in the fourth quarter, and repurchased common share for $25 million. We have thus distributed a total of $36.3 million to our shareholders this year.We also invested $45.5 million during the year, of which $33.1 million was for business acquisition and $12.4 million for equipment to maintain and improve operational efficiency and for IT equipment.As at November 30, 2020, cash totaled $73.9 million, and our working capital was $377 million for a current ratio of 3.6:1.I now turn it over to Richard.

[Richard Lord, CEO, President & Executive Director]

Thank you, Antoine. In the current situation, we continue to strictly respect all prevention measures issued by the various government to protect our employees, customers and business partner as much as possible. We will continue to be proactive and manage the business efficiently, while remaining very watchful of the evolving health and business environment. We will continue to apply the strategy that are paid off so far, mainly our strategies of innovation, business acquisition, distinctive service, e-commerce with Richelieu.com and market development. Our core strengths provide us sound condition on which we will continue to build notably.Our business model is well adapted to our customer's needs, our value-added service, the quality and efficiency of our network of 84 strategic centers, the number and diversity of our customers, our commitment and dedicated team and the soundness of our financial position.In conclusion, I would like to mention that this morning, the Board of Directors approved a 4.9% increase in the quarterly dividend to $0.07 as well as the payment of a special dividend of $0.0667 as a compensation for the dividend that was not declared in the first quarter of 2020. I take this opportunity 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]

[Operator Instructions] And your first question is from Hamir Patel, CIBC.

[Hamir Patel]

Congrats on another strong quarter. Richard, could you comment on how sales have fared since the end of November?

[Richard Lord, CEO, President & Executive Director]

I think we -- I think the trend that you have -- we have in the last quarter continue to be strong with the sales increase well over double digit. So we expect that to continue for -- still for a while. We don't know how long, but we still benefit from the fact that the hardware stores are buying more because we were suppliers for essential services. And we also see an increase of -- with the retail manufacturers, which is stronger than it was in the last couple of quarters.So just to give you an idea, overall in North America, without acquisition, the kitchen cabinet market increased by 22%, of which 15% in Canada and 7% in the U.S. The architectural woodworking increased over like 2.2%. So it's just that it's flat in the U.S., but we have an increase in Canada of 7%, which is positive that this market is turning.Also, we have the residential furniture, which is up by 8.6% all over North America. Office furniture is still down by 17%. So we understand why this market is down because the offices, which is the people working from at home means that they need desk for the offices. Another interesting aspect of our sales is the other, what we call here the other specialized market.As a matter of fact, this topic, we will have to -- maybe to split the various market segments that are included in this topic. But just to give you an idea, this topic for the other specialized market, our sales increased by 20%. And this is due to the closet market, which is all new market, closet market, door and window market, glass hardware market and e-tailers market. That means the investment that we have made in these new markets are really paying us and as we say that the increase has been very strong in those market segments.

[Hamir Patel]

That's very, very helpful. I'm just curious, in Ontario and Québec, where maybe there's of late more restrictions on construction. What impact are you expecting that to have?

[Richard Lord, CEO, President & Executive Director]

We don't expect much impact with the construction. But what we expect, though, is that we see that for the hardware retailers, because we have access to their POS, point-of-sales figures, and we see that because of the restrictions that both the government of Ontario and Québec have imposed to the market, we see sales going down. That thing should last, I think, at least for another 2 or 3 weeks, if I remember well. So that means that we might expect the slowdown in the sales to the hardware stores maybe next month because so far, though, they continue to buy as usual, but we see that because of those new restrictions, the market is affected.As far as the construction is concerned, we don't see our customers like the cabinet manufacturer, we don't see any slowdown so far. Things are going very well.

[Hamir Patel]

Okay. That's helpful. And then, Richard, on the last conference call, you talked about potential for price hikes on some of the products in 2021. Is that playing out? And what's the magnitude of any increases? And how much of the portfolio is affected?

[Richard Lord, CEO, President & Executive Director]

We are working on that, actually. We don't know yet what will be the magic numbers. But because we have not received all the price increases from our various suppliers from around the world, but we expect that -- I would say that price would increase probably between 4% and 5% in the course of the next few months. And those increases will take place on certain dates, let's see, based about 90 days for the hardware retailers. And for the manufacturers, most of 80% of the market, it does apply 24 hours after we've made a decision and a few other customers that are manufacturer that we work with contract with, it takes another 60 days. So basically, yes, we have to expect that as far as we see right now.

[Operator]

[Operator Instructions] Your next question is from Edward Friedman with CWB.

[Edward Friedman, Senior Research Analyst]

Oh, sorry, I was on mute. The most famous sentence in 2020, I was on mute. Sorry. Again, congratulations for a very good -- strong quarter. I have 2 questions. One is on the U.S. market. I was wondering if you can give some sort of an update on how the U.S. market is behaving. Because when I look at your results in the U.S., your results were a little bit weaker than compared to Canada. So I was just wondering if you can give an update on how the reno market is behaving in the U.S. compared to Canada?And second, about capital allocation. So you did an NCIB of $25 million this year and also announced another one in December. Given I imagine that you have many opportunities of acquisitions, which you did also in 2020, I was wondering if it's not better to spend the money on acquisition and to do buybacks, given that your float is not enormous.

[Richard Lord, CEO, President & Executive Director]

Regarding the U.S. market, maybe Antoine will answer the second part of the question. The U.S. market, yes, we don't have the growth that we have it in Canada, but the more we go -- since the beginning of the COVID, the more we see the sales improving in the U.S., it's hard to precisely mention what is the big difference between the Canadian and U.S. market. We -- as you're aware, we thought as well that the growth could be similar, but that's not the case. But the more we go, the more it's increasing, so basically, hopefully, that will continue to improve for the next quarter and we could have a different explanation for our next call. But we're on the right track in the U.S. and that's about -- what I can say about that.Antoine?

[Antoine Auclair, VP & CFO]

Yes. And if I may, for the second portion of the question. So for sure that the priority for capital allocation is acquisition. So the pipeline is still healthy. We have nice opportunities in the States, in Canada as well. So this is the priority. We have a buyback program in place, so when we have opportunities to buy back blocks were there and we have a quarterly dividend policy. So that's -- it's been there, it's been the recipe for the last -- for the many years -- past many years, and it's still the recipe. But for sure, the priority is the acquisition.

[Operator]

The next question is from Zachary Evershed with National Bank.

[Thomas Bolland, Associate]

It's actually Thomas calling in for Zachary. My 2 main questions have been answered. Maybe if I may ask, you mentioned some cost-saving initiatives. Could you give us more color on that and what you may or may not be able to retain after the pandemic?

[Antoine Auclair, VP & CFO]

Yes. With -- the cost-saving initiatives is basically in terms of resources and also travel expenses. So certainly, some of these expense will come back to normal, but we still have measures in place to make sure that we -- first of all, we follow the rules, we implement ban on travel. So those are still in place. And we're going to be monitoring the -- what's the different laws from various governments to make sure that we monitor this very carefully. But those cost reductions are still in place.

[Thomas Bolland, Associate]

Okay. And so you mentioned that you still have travel ban in place. Does this make it harder for you to conduct due diligence in your M&A pipeline?

[Antoine Auclair, VP & CFO]

No, actually we...

[Richard Lord, CEO, President & Executive Director]

Okay. We have local people almost everywhere. So people -- we have our people that visit -- is in the U.S. that go and visit the places. And the rest is done as usual by phone and Teams. Antoine, would you have something to add?

[Antoine Auclair, VP & CFO]

No, that's it. We've been able to close many acquisitions this year. So we've done things differently. We've used our teams that are on site. So we've done things differently. So it does not stop us for making acquisitions.

[Thomas Bolland, Associate]

Fantastic. Maybe 2 last for me. The stress and the higher pace of activity due to COVID-19. Do you think older owner operators, have you seen them come forward and maybe start discussions? Or is it unchanged and people keep their heads down and keep working?

[Antoine Auclair, VP & CFO]

No, not yet. Basically, like I said, the pipeline is still healthy. What you just described might happen, but not necessarily right away because it's not necessarily the time to sell your business. You all want to rebuild it. But we think that probably some owners will have enough and will decide to -- that they don't want to live that again and to start discussion with us. But like we've seen in 2009, '10, '11, after this period, we've seen a lot of acquisition mainly in the U.S. So this could happen again. But as we speak, this did not happen yet.

[Thomas Bolland, Associate]

Okay. And maybe my last one. We've seen some activity with bigger deals in the industry. Has Richelieu received any inbound interest to be acquired?

[Richard Lord, CEO, President & Executive Director]

No, not really. I think a lot of people are looking at Richelieu with a lot of interest. But I think because the view that Richelieu is very well evaluated in the market so far and the future remains great, Richelieu will continue to be on his own as we are now. I think that's the best way to go. And whatever is going to happen in the course of 2021 and after in 2022, you've seen in -- that's not the first crisis that we have to live with. Richelieu have always been successful during and after the crisis.I think all the crisis are reinforcing Richelieu. We really have the feeling that Richelieu is gaining market share because we have continued the best -- our best effort to maintain a very high service for all our customers. All our warehouses are connected together. So if a customer needs a product, wherever the product is, we make sure that the customer will receive the product as quick as possible. I don't know that many suppliers that could achieve some good deliveries like we're doing actually to the market. We don't try to save any effort to satisfy our customer. Our warehouses are all connected together. So the customer might be in Boston, the stock is not available in Boston, that's going to come from Detroit or it could come from Toronto, from Ontario as well, if necessary. So that does result in increased sales and increase of loyalty from our customers, and we keep gaining new customers. So -- and that should continue on in the months to come.

[Operator]

[Operator Instructions] There are no further questions at this time, you may proceed.

[Richard Lord, CEO, President & Executive Director]

Okay. There's no more question. We'd like to thank you very much for your support, your good questions, and hopefully, we're going to have to -- another chance to talk to you soon, maybe to meet you soon, eventually. So thanks a lot, and have a nice day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participating and ask that you please disconnect your lines.