Richelieu Hardware Ltd

TSX:RCH

Earnings Call Analysis

Richelieu Hardware Weathers Sales Dip, Invests for Growth

Richelieu Hardware's Q4 sales dipped slightly by 0.8% to $454 million, with a 1.2% decrease in sales to manufacturers, softened by steady performance in the hardware retail market. The company's EBITDA for the quarter fell by 23.3% to $58.8 million, while annual EBITDA was down 19.8% to $230.4 million, with net earnings decreasing by 33.8% to $111 million, reflecting a return to pre-pandemic operating expenses and expansion investments. Despite these drops, operating activities generated a robust $271 million cash flow, with the company investing $62 million, including $20 million in strategic acquisitions adding $152 million in annual sales, and $42 million in operational improvements. Dividends paid increased by 15%, evidencing strong shareholder commitment. Recent acquisitions of Olympic Forest and Rapid Start are expected to augment sales by $18 million annually, positioning Richelieu for promising results in 2024.

End of Year Financial Performance

Richelieu Hardware concluded the 2023 financial year on a robust note with fourth-quarter sales remaining steady compared to the same quarter of 2022. A key highlight was the generation of over $70 million in cash flow from operating activities. Although the company experienced an alignment with the prior year in terms of total sales, including acquisitions, it successfully maintained discipline in its financial operations—evident from the healthy $271 million cash flow accrued over the year.

Strategic Acquisitions and Expansion Projects

In 2023, Richelieu committed to strategic expansion, adding six companies to its portfolio, contributing an additional $152 million in annual sales while simultaneously enhancing the firm's customer base and workforce. Moreover, the company's continued investment in optimizing network operations has led to the successful completion of several expansion projects across the United States and the notable consolidation of operations in Calgary into a 250,000 square foot facility.

Financial Highlights and Future Prospects

The fourth quarter saw a marginal dip in sales by 0.8%, with EBITDA and net earnings affected by the resumption of pre-pandemic operating expenses and investment in the expansion and modernization of distribution centers. Specifically, fourth-quarter EBITDA was $58.8 million, down 23.3%, with an EBITDA margin of 13%, while net earnings attributable to shareholders totaled $28.5 million, reflecting a 33.8% drop on a yearly basis. However, Richelieu remains committed to innovation and has outlined a positive outlook for 2024, supported by a strong balance sheet and a no-debt policy, furthering its 30-year history of solid financial results.

Liquidity and Capital Allocation

Richelieu's financial position showcases a strong balance sheet, with net cash standing at $24 million as opposed to a net bank overdraft in the previous year. The business also demonstrated prudence in capital allocation, investing $62 million over the year, which included acquisitions and operational enhancements. Throughout the year, shareholders were rewarded with dividends totaling $33.5 million, up by 15% from 2022, alongside strategic share repurchases.

Forward-looking Statements

Although precise forward-looking sales figures for the new fiscal year have not been disclosed, executive commentary suggests that the trends observed in the last quarter of 2023 continue to prevail. This may indicate stability in Richelieu's business operations as the company navigates the new fiscal year.

Earnings Call Transcript 2023-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 18, 2024. [Foreign Language]

[Richard Lord, executive]

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu Conference call for the fourth quarter and 12-month period ended November 30, 2023. 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. We ended 2023 with a solid fourth quarter. Our sales are nearly in line with those of the same quarter of 2022 when the renovation market continued to benefit from favorable market conditions. Our inventory levels continue to improve, helping generating over $70 million of cash flow from operating during -- from operating activity during the quarter.

As for the EBITDA and net earnings, these were essentially impacted by the return to pre-pandemic operating expenses and costs incurred in projects to expand and optimize several of our distribution centers, mostly in the U.S. For fiscal 2023, our total sales, including acquisitions, are also in line with those of 2022. Throughout the year, we maintained our commitment to financial discipline in order to continue generating healthy margins and strong cash flows, as shown by the $271 million generated from the operation this year.

2023 was also another good year for acquisition complementary to our activities as well as concrete achievements in our network in line with our optimization culture. We invested in 6 new acquisitions, Unigrav,Usimm, Quincaillerie Rabel, all three in Quebec then Trans-WorldDistributing in Nova Scotia, Maverick Hardware in Oregon and Westlund Distributing in Minnesota. With this full acquisition completed in 2022 we're adding $152 million in sales on an annual basis as well as expanding our customer base and are offering and adding talented people to our team.

Regarding our network projects undertaken to better seize market growth opportunities, optimize our operation and service, we are pleased with our achievements to date. We have successfully completed the expansions of our centers in the Atlanta, Nashville, Fort Myers, Pompano and Seattle areas. Our brand-new Chicago Center serving the retailers market is fully operational, has out the 2 new centers in the Minneapolis and Carlstadt regions.

In December, we completed our Calgary expansion by consolidating the 2 centers into one single 250,000 square feet building. This center will become a destination for our customers, architects and designers with a state-of-the-art showroom. In addition, we will be able to serve our retail customers in Western Canada and our certain Alberta manufacturers from one single location. I'd also like to add that 2023 was a strong year in terms of innovation as we added many innovative solutions in several of our product categories all available in our one-stop shop network and on richelieu.com for our customers, optimizing the customer experience is always at the top of our priorities.

Antoine will now review the financial highlights of the quarter and the year. Then I will conclude and we will take your questions. Antoine?

[Antoine Auclair, executive]

Thanks, Richard. Our fourth quarter sales reached $454 million slightly down by 0.8%. Sales to manufacturers stood at $393.1 million, down 1.2% of which 2.8% from internal decrease and 1.6% from acquisition. In the hardware retailers and renovation superstores market, we achieved sales of $61 million in line with 2022. In Canada, sales amounted to $267 million, a decrease of $6 million or 2.2%.

Our sales to manufacturers reached $220 million, down 2.5%. As for retailers market, sales stood at $47 million, in line with last year's. In the U.S., sales totaled USD 136 million, same as last year. Sales to manufacturers reached $126 million in U.S. dollar, down 0.7%. In the retailers market, sales were up 8.8%. Total sales in the U.S. reached CAD 186 million an increase of 1.2%, representing 41% of total sales. Total sales in 2023 reached $1.8 billion, a slight decrease of 0.8%, of which 1.8% from acquisition and 2.6% from internal decrease.

Sales to manufacturers reached $1.5 billion, down 0.8% of which 2.9% from internal decrease and 2.1% from acquisitions. Sales to hardware retailers were down by 1% or $2.6 million to $248 million. In Canada, sales totaled $1 billion, down 2.5%, of which 4.4% from internal decrease and 1.9% from acquisitions. Our sales to manufacturers amounted to $856 million, down by 2.4%, of which 4.7% from internal decrease and 2.3% from acquisitions. Sales to hardware retailers and renovation superstores were $198 million, down 2.9%.

In the U.S., sales amounted to USD 548 million down 2.7%, of which 4.4% from internal decrease and 1.7% from acquisitions. They reached CAD 740 million, up 1.6%, accounting for 41% of total sales. Sales to manufacturers reached USD 506 million, a decrease of 3%, and sales to hardware retailers were up by 1.2%. Fourth quarter EBITDA stood at $58.8 million compared with $76.7 million last year, down 23.3%. EBITDA margin stood at 13%.

For the year, EBITDA was $230.4 million, down 19.8% and EBITDA margin stood at 12.9%, reflecting the return to operating expense closer to pre-pandemic level and expenses incurred specifically for projects to expand and modernize several of our distribution centers.

Fourth quarter net earnings attributable to shareholders totaled $28.5 million compared with $44.9 million last year. Diluted debt earnings per share reached $0.51 compared with $0.80 in 2022. For the year, net earnings reached $111 million, a decrease of 33.8% and $1.98 per share compared to $2.99 per share last year. Fourth quarter cash flow from operating activities before net change in noncash working capital balances were down 20.7% to $49.3 million or $0.88 per share. Net change in noncash working capital balances represented a cash inflow of $23.3 million, reflecting mainly the change in inventory and accounts receivable.

Consequently, we generated $72.7 million in cash flow from operating activities compared with $3.6 million for the fourth quarter of 2022. For the year, opening activities generated a cash inflow of $271 million. Net change in noncash working capital balances represented a cash inflow of $80.2 million, mainly resulting from improved inventory level. During the year, we paid dividends of $33.5 million, up 15% over 2022, of which $8.4 million were in the fourth quarter and repurchased common share for $800,000. We have thus distributed a total of $34.3 million to our shareholders this year.

We also invested $62 million during the year, of which $20 million was for business acquisitions and $42 million, mainly for equipment to maintain and improve operational efficiency, including additions resulting from expansion projects and for the purchase of a building in Drummondville Quebec. As of November 30, 2023, net cash amounted to $24 million compared to net bank overdraft of $112 million last year. Our working capital was $622 million for a current ratio of 3.7:1. I now turn it over to Richard.

[Richard Lord, executive]

Thank you, Antoine. I will now conclude with our most recent developments. On December 1 and January 15, respectively, we completed 2 new acquisitions. Olympic Forest, a specialty wood and tile distributor operating a distribution centre in Erin, Ontario and Rapid Start, a specialty hardware distributor with one distribution centre in Rittman,Ohio. These 2 transactions, in line with our objectives, will add sales of approximately $18 million on an annual basis. We will also benefit from the expansion projects undertaken in the last 2 years.

Richelieu is well positioned to achieve good results in 2024. That will fit very well with our solid financial history over the last 30 years as a TSX-listed company. Our acquisition strategy supported by a strong balance sheet with no debt. Our innovation and value-added service have always served the company very well. We continue to execute them for the year to come. Thanks, everyone. We'll now be happy to answer your questions.

[Operator]

[Operator Instructions] Your first question comes from Hamir Patel from CIBC.

[Hamir Patel, analyst]

Richard, could you give us a sense as to how your sales are tracking through the first 6 weeks of the new fiscal year?

[Richard Lord, executive]

Yes. I see -- what I see the trend that we had in the last quarter of 2023 continue to be effective as we speak. We don't see the first quarter with a positive organic growth because of the situation of the market. But we expect basically the first half to be, I would say, no growth or negative -- slightly negative growth. What we do expect -- we don't know why exactly, but we expect that the second half should be much better.

This is where after reading what's going on in the market, we're [indiscernible] to our sales force and our people and our customers, we feel that the second quarter will be much better because the first quarter is also being impacted by some inventory left from the pandemic period where we still have about $25 million of excess inventory, with the home costs.

But we have to live with that for at least the next quarter and maybe the next 2 quarters. But basically, things are very healthy. The balance sheet is very clean. The cash flow is very clean. Our sales force is intact. What we hear from the competition is that we're doing much better, but we cannot make a clear demonstration of that. But we feel that we've really continued to capture the low market penetration, selling to our customers and again, because of the new product that we have introduced and the acquisitions, the pipeline is very healthy. Basically, that should be a good year for acquisition.

[Hamir Patel, analyst]

Okay. That's helpful. So the -- it sounds like last quarter, you had kind of pointed to be excess or higher warehousing costs being incurred for through the first half of fiscal '24, and it sounds like you'd still expect to kind of work through that excess inventories by the end of Q2. Is that fair?

[Antoine Auclair, executive]

Yes, that's fair, Hamir. Basically, what I'm expecting is -- will be flat for the first quarter because with the Chinese New Year, we have to order in advance. So we should have a flat inventory for the first quarter, and I'm expecting a reduction of around $25 million over the next few quarters.

[Hamir Patel, analyst]

Okay. Great. And then just asking turning to EBITDA margins that moderated further to 13.0%. Does that mark the low of the sort of go-forward business? Or would you expect that to continue to trend lower for another quarter or 2 before inflecting higher again?

[Antoine Auclair, executive]

Yes, I would expect to continue to trend lower because with a volume that is slightly down, I'm expecting the EBITDA margin to be anywhere between 12% and 13%. So in a better market environment, the 13% is achievable. In a more difficult environment, I would say, around 12%. So we're anywhere between 12% and 13%.

[Hamir Patel, analyst]

Okay. And for a full year '24 Antoine do you have a sense as to what sort of margin you would expect on a full year basis?

[Antoine Auclair, executive]

Depending of the market condition, it's between 12% and 13%.

[Hamir Patel, analyst]

Okay. Fair enough. And just a last question I had. I noticed in prior years, the company tended to announce a dividend increase with the fourth quarter results. Richard, is there a reason this year, the Board held off?

[Richard Lord, executive]

No, we think that we are increasing the dividends. I don't know how much we have increased. The last time we have increased, I think, was a very big increase. So we thought that we could -- should take it easy this year. But that doesn't mean that -- don't forget that our dividend policy is per quarter, and it's not a yearly dividend. So basically, we can make change whenever it's going to be needed.

[Hamir Patel, analyst]

Okay. Fair enough. That's all I had. I'll turn it over.

[Operator]

[Operator Instructions] Your next question comes from Zachary Evershed from National Bank Financial.

[Zachary Evershed, analyst]

So in terms of gross margins and pressure there, is the effort to reduce inventory weighing on that? Or are there other factors at play?

[Richard Lord, executive]

So the excess inventory, as I said earlier, we're still left with $25 million. That should go quite fast. I would think in the first 2 quarters, we should get rid of that. Unfortunately, this is creating some decrease of the gross margin temporarily. Is it important to specify it temporarily because basically, our margin for the product that we have paid the right price that we sell now, we sell the same margins that we had before. That will come back to that.

Basically, we have to a little bit of some deflation but as I said, it's going to affect mainly the retail hardware stores because the product that we sell there is mainly from Asia. So basically, our cost would be will decrease -- some of our selling prices will decrease, but as a percentage, the growth margin will remain the same to.

[Zachary Evershed, analyst]

That's good color. And you also mentioned that there were some project expenses weighing on EBITDA margins. How much was that in Q4 in dollars or basis points?

[Antoine Auclair, executive]

In dollars, in Q4, you can could estimate around, for sure, $1 million dollar in Q4.

[Zachary Evershed, analyst]

Perfect. And then you mentioned that the acquisition pipeline is looking pretty good. Are seller expectations coming back down to earth after being inflated during the boom time?

[Antoine Auclair, executive]

Yes, that's a good point. So for sure that now we're looking at -- we're basing the acquisition based on 2023. So it's going to certainly change how we address these acquisitions. So yes, it's coming down to more reasonable prices.

[Zachary Evershed, analyst]

Excellent. To 2023, very eventful for projects. Should we expect more of those in 2024? Are you happy with where the network sits?

[Richard Lord, executive]

No. We finished with this. I think all the projects that we have to do at the initial the end of 2023. We're in the process of finishing -- were finished Calgary in the month of December. In the year to come, we're going to have in Vancouver, we're going to have to make a change in Vancouver. But that's not a major project, though, but we don't have any chance because we cannot take any chance because actually, we have some businesses that have double up in size there with -- and with which we have to operate in 2 the different warehouses and getting the stock back and forth from one warehouse to the other. So we have to rationalize a few things, but that's going to be probably the only projects.

[Zachary Evershed, analyst]

That's perfect. That's it for me.

[Operator]

Presenters, there are no further questions at this time I will turn the call back over to you Sir for closing remarks.

[Richard Lord, executive]

Okay. So thank you very much for attending this call. We'll always be happy to talk to you if you decide to call us. So have a good day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.