Q3 2020 Richelieu Hardware Ltd Earnings Call

Good afternoon, ladies and gentlemen, and welcome to issue New hardware third quarter results conference call. At this time all lines I know listen only mode. Following the presentation. We will conduct a question and answer session, which will be restricted to analysts only if at any time. During this call you may cry immediate assistance. Please press star.

No for the operator also note that this call is being recorded today October eight 2020 modules.

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Missy Thank you.

Ladies and gentlemen, and welcome to this conference call for the third quarter and nine month period ended August 31st Taunted Wendy with me.

With me you don't want to try and CFO as usual no not sold to these you include forward looking information, which is provided with the usual disclaimer as reported in our financial filings.

The third quarter was if any other strong growth and high profitability.

We achieved these results thanks to our successful business strategy, notably the once.

The one stop shop approach all manufacturers market in various segments, such as kitchen cabinet architectural woodworking furniture clothes that glass door. When we do other work just to name a few.

Our retailers and innovations reversals market.

Our web strategy that stands out with this figure does come.

Got it and team and operational agility that allowed us to react quickly to the current environment.

I would like to highlight the strong sales growth of 82.5% in the hardware retailers and intuition superstores market stemming from the contribution of Michael acquired at the beginning of the year, which accounts for 36%.

And from a substantial increase in demand for and and how you will see that gold sales in the quarter.

As we speak so thats why the way retailers represent.

18%, so far this year compared to 14.5% last year.

Also went out.

Went out that improvement in the EBITDA I also want to went out the April when the EBITDA margin to 15.8%.

Compared to 12.6% last year and.

And the 56.3% increase in diluted net earnings per share standing at 50 cents compared to 32 last year.

In addition, during the quarter, we concluded two new acquisitions.

For a total of five this year.

Those acquisition altogether will result in additional sales of over $70 million on an annual basis.

As unknowns as announced last July we acquired Central also sockeye enrichment, Virginia, which gave us access to this new jewelry geographic markets.

Then on August 4th we acquire long on outerwear in Uganda week.

Specializing in window and door hardware products and serving all of eastern Canada.

In addition to expanding our offering and customer base in this market segment, where.

Well, we already acquired two specialized distributors in 2019.

No the way completes all kind of Genco rage of this market segment.

Regarding the current pandemic situation, we continue to rigorously apply the measures require the development activities. In addition, we still have some 600 people so.

600 of our employees still walking from.

We adjust our cost structure as the situation evolves.

Approximately 5% of our workforce is still impacted by layoffs August use ours, and we are still limiting business travel by using technology, such as video conferencing.

I will now go to Antoine for the financial review.

Thank you Richard third quarter sales reached 311.2 million up by.

By 15.6% of which 6.9% from internal growth and 8.7% from acquisitions.

In Canada sales amounted to 203 million up by 12.8% of which 8.2% from internal growth and 4.6% from acquisitions.

Our sales to manufacturers reached 154.3 million 3 million up by 4.2%.

That's where the hardware retailers and renovation superstores market sales stood at $48.7 million up $16.8 million or 52.7% of which 40.7% from internal growth and 12% from acquisitions.

The significant increase is the result of major growth in the renovation market in Canada, as well as higher cyclical sales than last year.

In the U.S. sales grew to 80.6 million in us dollar up $13.1 million or 19.3%.

Sales to manufacturers reached 68.7 million in U.S. dollar an increase of 6% over the third quarter of 2019 of which 7.1% growth from acquisition and 1.1% from internal decrease.

Sales in us dollars to hardware retailers and renovation superstores were up 240.7% compared to last year, including 247.4% growth from our micro acquisition and 93.3% from internal growth.

As in Canada, the renovation market in the United States has been growing strongly resulting in a major increase in sales in this market.

The company also benefited in the third quarter from higher cyclical sales.

Total sales in the us reach $108.2 million in Canadian dollar, an increase of 21.2% and representing 34.8% of total sales.

For the first nine month of 2020 sales total 808.8 million up 4.1% of which 7.4% growth from acquisition and 3.3% from internal decrease.

In Canada sales reached $514.9 million up by $8.2 million or 1.6% of which 4.8% from acquisition and 3.2% from internal decrease.

Sales to manufacturers reached 406.4 million down $11.5 million or 2.8% of which 4.4, 0.1% growth from acquisition and 6.9% from internal decrease.

Sales to hardware, we theaters and renovation superstores at reach on an $8.5 million compared to 88.8 million up 22.2%.

In the U.S. sales amounted to $217.4 million in U.S. dollar up seven 2.7, 0.2% of which 11.9% growth from acquisition and 4.7% from internal decrease there.

They reached $293.9 million in Canadian dollar up by 8.8% accounting for 36.3% of our total sales.

Sales to manufacturers total 190 point for you as the us dollar.

An increase of $5.3 million or 2.9% over the same period last year of which 5.2% growth from acquisition and 2.2% from internal decrease.

Sales to hardware retailers into innovation superstores were up 53% compared to last year.

Third quarter, EBITDA reached $49.1 million up $15.2 million or 44.8% over last year, resulting from significant increase in sales in the retailers market together with action to reduce cost and government subsidies.

Gross margin remained stable and the EBITDA margin stood at 15.8% compared to 12.6% last year.

For the first nine months EBITDA reached $107.7 million up 20.8%. The gross margin remained stable as for the EBITDA margin. It stood at 13.3% compared to 11.5 last year.

Third quarter net earnings attributable to shareholders totaled $28.7 million up 56.6%.

Net earnings per share were 51 cents basic and 50 cents diluted compared to 32 cents basic and diluted last year, an increase of 59.4%.

For the first nine months net earnings attributable to shareholders reached 50 158.1 million up 22.8%.

Diluted net earnings per share stood at one dollar three cents compared to 83 cents up 24.1%.

Third quarter cash flow from operating activities before net change in working capital balances amounted to $38.1 million or 67 cents per share an increase of 43.8% compared to last year, resulting primarily from the net earning growth.

For the first nine months, there were up 21.2% totaling $85 million or $1.50 per share.

For the third quarter of 2020 financing activities used cash flow of $9.2 million compared to 11.6 million last year.

Dividends paid paid to shareholder of the corporation amounted to $3.8 million up 4.2%.

For the first nine months financing activities used cash flow of 19.9 million compared to 29.1 in 2019.

During the third quarter, we invested 22 at 12.9 million, including 9.7 million for the two business acquisitions during the.

During the first nine months, we invested $42.3 million of which $33.1 million for the fire business acquisitions, and 9.2 million primarily for the purchase of equipment to maintain and improve operational efficiency.

We continue to benefit from a healthy and solid financial position cash balance of 74.5 million almost no debt working capital of 376.2 million for a current ratio of 3.6 to one.

I now turn it over to Richard.

Thank you everyone.

We remain quite confident but still watch will.

Looking back at some September we can see an upward trend in the manufacturers market and still very strong in the habit of retailers and innovation superstores market.

But we understand this is due to exceptional circumstances.

We continue to build.

On our strengths and value added concept in order to provide distinctive are not standing service to our customers.

With the business model, well adapted to customer needs and a sound financial position you should view is well positioned to pursue its innovation market penetration and acquisition strategy, which are our main growth drivers.

We also announced this morning, the board of directors approved the payment of a quarterly dividends of 667 cents per share payable on November 15.

In conclusion.

I would like to thank all team and business partners for their support in this challenging period. Thanks, everyone. We'll now be happy to answer your questions.

Thank you ladies.

Ladies and gentlemen, if you do have a question. Please press star followed by one.

Also be reminded the questions will be limited to analysts today.

Once you have press Star one you will hear from acknowledging your request.

Should you decide to withdraw your question please.

Star followed by one and if you are using a speakerphone, we ask that you. Please lift the handset before pressing any Keith. Please go ahead and press Star one now if you have a question.

And your first question will be from <unk> Patel.

Capital markets. Please go ahead.

Hi, good afternoon, and congratulations on the strong Q3 results.

Richard could you.

You gave some comments on how September was hearing qualitatively could you quantify how your sales fair to now in the month of September.

Yes, I could say that.

I think we our sales to manufacturers that we.

We the I would say around 5% increase that.

And I guess does this trend should continue at least until we see Christmas we don't know after Christmas, though as far as for the hardware retailers. The market remains very strong maybe not as strong as it was in the last quarter, but still very strong. So we expect a very good growth in this market as well.

Hey, great. Thanks, that's helpful and when did you have the three just over $3 million of government grants in Q2.

How much do you get in Q3 and would you expect to get anything in Q4.

3.5 in Q3 and nothing into four.

Great that's helpful and Richard when we look at the EBITDA margins.

Earlier.

Change over the last two quarters.

The 15.8%.

Do you think you can sustain that into into Q4.

As a hardware retailers market, maybe normalizes next year, what's what's your objectives.

For long term margins.

I think the margins EBITDA margins should still be very good in the indicator in the fourth quarter and the.

But you know I would say if we know when dated the distribution come back to normal I think we've done better comparison that we can have is with the 2019, but for the time being in the short term, yes. The margin we continue to be strong it's up be our gross margin is rather stable I think the increase in EBITDA margin is the result of reduced.

Expenses and the additional sales mainly in the retailers market that brings without increasing our expenses much still we have to mention also that.

So we have to mention also that we spend more because I think all the.

Did some shows on centers are delivered to the other retailers are working seven days a week since two months. So it does increase DXP.

The expenses was up to an extent, but its minimal compared to the degree that the positive effect of those additional sales on the EBITDA margin.

Great. Thanks, that's all I had for now I'll get back in the queue.

Thank you.

Once again as a reminder, ladies and gentlemen, if youre, an analyst and would like to ask a question. Please press star followed by one on your Touchtone phone and your.

And your next question will be from Zachary Eversheds of National Bank Financial. Please go ahead.

Thank you good morning, everyone congratulations on the quarter.

Thanks.

And so for retailer sales you mentioned that.

Current quarter will be a little less strong than last quarter can you help us understand the performance throughout Q3, perhaps when the peak in retailer sales once.

Yes, maybe we can see it's a it's a peak here it says.

It has been a very strong period than the cyclical sales were quite high we don't expect that in the fourth quarter, but for the regular sales I think in the type of growth that we had in the in the third quarter should continue on maybe not to be as high but still be quite quite there which are very high in disc ops answers. So.

So its much much over 25%.

Thank you.

And with.

With line hardware, you've completed your Acadian coverage for Windows and doors do you have a next area of interest that youll be looking to flush out your coverage.

Yes, we are still other targets to improve our market presence in Canada and now we maybe we will be open to make that type local equity in the us as well.

Okay that's interesting.

And in terms of the pace that you are on you've been doing exceedingly well this year compared to your historical average and do you see yourself, maybe expanding the range of targets looking for larger acquisitions in the future.

Anything that is moving that would be interesting for us where we'll we'll target, but actually we still walk with within the same range. Because this is what is available in the market, but we keep our eyes open if it eventually if something bigger comes to our attention you can be sure of one thing we're going to make our Dennis. This is where there is is to justify a possible acquisition.

Thank you that's helpful. And then one last one for me in terms of your negotiations with acquisition targets has covered brought in any changes to the structure of the deal maybe a difference in the earn outs or just a different calibre negotiations I guess not.

And also fight it does not change anything we expect maybe after the call via that route there would be more company for four sales because you know the people that have been in business for 30 or 40 years, maybe they have enough of the various questions that we have to get through in the in the financial and the business market in North America.

It's exciting times. Thank you for taking my questions I will turn it over.

Thank you next is a follow up from <unk> Patel. Please go ahead.

Richard.

This year a lot of the growth looks like it's been fueled by volumes.

As you look out to 2021 do you see room for price to be a lever to pull for sales growth.

No. They are the depressing the so far this year the pricing has been rather stable you are talking about the pricing of the products.

Acquisitions, we've got the product that product pricing, yes, it's been rather stable, but we see now that the steel prices started to increase so that good middleware. The one of the reason why our suppliers might increase there they're selling.

Selling price so as a result of that we should if it does happen and would certainly happen I would seem that the course of the next three to four months, we'll have to increase our pricing at accordingly, as well so that should not affect the gross margin over the sugar if not maybe temporarily for a few weeks.

Right, then I guess higher prices would be it would be a positive so exactly.

Hey, that's sort of that's reviewed answer yes.

Would it be sort of like mid single digits or something or we don't know we don't know yet I think we could be between four and 7% we don't know yet.

Okay, and not enough for all the product of certain products, mainly to product coming from Asia.

Okay No that's that's all.

Thats helpful. And then just digging into on a retailer side that 46% organic growth.

How much of that was underlying demand and how much of that was just the timing of the large cyclical customer.

Don't have that with me the exact figures, it's mainly with the regular customers that we do the cyclical any of the cyclical sales represent 5% of the 40%. So it's so the rest is done or the secular demand for you to grow product that we have in stores thats. It.

Okay, well that's that's that's helpful.

Thats helpful and Richard I was just wondering if you could.

Give us an overview of how you where you think your market share stands at.

Today across the different categories and in Canada, and the U.S.

Because it seems like you must be picking up market share this year and I don't know if that's if you would agree with that.

We do actually we think also that we do we're capturing more market share because our sales force kept walking in oil Vodafone contacting customers and we keep innovating with the product and we are a one stop shop and that I think we might we made the right decision. The last March the decision on where to make sure that we don't decrease our purchasing.

No inventory, even though as a result of deal with those strong sale would you see a decrease in our inventory and at a higher turnover of our inventory, but because we were not expecting such a such an increase with our retailers. So basically our market share with the retailers for the product as we said in Canada, which while it is as a seven day.

<unk> percent and therefore for the for the manufacturer that we see I would say, 70% to 70% of same thing in Canada in the West we are still small I think in the area, where we have been for more than five years of market trends, probably 20% than the other the new area. It's about 5%. So that's good news because that we can do nothing but increase those sales into it.

In the future regarding the retailers to us when we're not even touching the market yet even with the we're going to sale.

Much of this year Antoine 30 million dollar.

Mainly thanks to the mobile acquisition, but Mike will give us a you know a good way to increase our sales in the in the U.S. because they have more.

Representative the service more customers. So the result of that acquisition in the us regarding the retailers should be very good.

Okay.

Great. Thanks, Thanks for that that's all I had I'll I'll turn it over.

Thank you.

Ladies and gentlemen, as a reminder, if you do have a question at this time. Please press star followed by one on you touched on the phone.

And at this time Mr. law, we have no other questions registered Sir.

So it was up it it will be good to talk to you So you're welcome to call us.

On the phone if you have a anymore questions, we had as you'll dispositions. So thank you very much.

Thank you, Sir 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.

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