Q2 2023 Richelieu Hardware Ltd Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the sheer hard work second quarter results Conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session, which will be restricted to analysts tell me if at any time during the call you require immediate.

Justin Please press star zero for the operator.

Cause being recorded on July six 2023.

So Mitch I may Miss J D M. New York has had to do with Dennis Smith that Ken Kathy his clip he's not in Oh links all time my Big question that she put a pause on paas shelton's shallow parsing. It because you have the cursed child Hawk saga.

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So did I felt I missed you Richard Lord is there a shift electronic shelf that's behind it.

And if you see good afternoon, ladies and gentlemen, and welcome to leisure use conference call for the second quarter ended may 31st in first half of 2023.

With me, it's not one of last year.

As usual note that some of today's issue include forward looking information, which is provided with the usual disclaimer as reported financial filings.

In the second quarter, we achieved good results and ended the period with a strong position building on our major strengths, namely or most of the excess value added service concept and our ongoing acquisition strategy.

Comparison with the second quarter was 222 shows a decrease in sales and earnings but.

It should be remember the first half of 2020, that's currently favored by exceptional increases.

Context, resulting from the pandemic.

To put things in perspective, if we compare second quarter of 2023 to the same quarter in 2002.

2019 sales increased by 68% and EPS by 67%.

During the quarter, we completed two acquisitions in the U S. One in Oregon, Maverick outerwear and Fuji.

The other one immunotherapy wisdom discrete distributing and Monticello.

Two convertible at specialty distributor, we extend and strengthen our presence in this market.

That makes six six acquisition since the start of 2023, Eddie some $26 million in annual sales.

In addition, we opened a new distribution centers in Minneapolis and continue to make progress.

With all the expansion and modernization projects at our Atlanta, Nashville, Seattle, and Portland home centers.

Which we expect to complete very soon.

This will add some 500000 square feet to our U S network.

From a total of 150 and to connect their distribution centers in North America. We now operate 62 in the U S.

Which accounted for 42% of our total sales in the first half of 2023.

Now I'll review the financial highlights of the quarter and first half then I will conclude and we will make and we will take your questions.

Thank you Richard second quarter sales reached $272 4 million down three 2% of which four 7% from internal decrease and one 5% from acquisitions.

Important to note that in the second quarter of 2022, you said you had to achieve exceptional internal growth of 16, 1%.

Including a 22, 7% increase in the U S.

In Canada sales amounted to $279 5 million down four 3% of which six 4% from internal decrease partially offset by a two 1% positive contribution from acquisitions.

Our sales to manufacturers reached $229 9 million down 3% and for the hardware retailers sales stood at $49 6 million down nine 8%.

In the U S sales grew $241 9 million in U S dollar down seven 9%.

Sales to manufacturers reached $131 3 million in U S dollar down seven 2% seven 2% sorry in the hardware retailers and renovation superstores market sales reached $10 6 million.

And Canadian dollar total sales in the U S reached $192 6 million a decrease of one 6%.

For the first half sales reached $875 1 million up <unk>, 3% of which one 8% from internal decrease and two 1% from acquisitions.

In Canada sales reached $510 4 million down $11 2 million or two 1% of which three 9% from a total decrease and 1% from acquisitions.

Sales to manufacturers reached $415 4 million down $7 3 million or one 7%.

Sales to hardware retailers and renovation superstores reached $95 million compared to $98 9 million down three 9%.

In the U S sales amounted to $269 6 million in U S dollar down two 4% of which four 8% from internal decrease and two 4% from acquisitions.

They reached around $364 7 million in Canadian dollars up 4% accounting for 42% of total sales.

Sales to manufacturers totaled $249 million, a decrease of $2 2 million or one 3% of which three 9% from internal decrease and two 6% from acquisitions.

Sales to hardware retailers and renovation Superstores awards were down 13, 8% compared to last year.

Second quarter, EBITDA reached $61 5 million down $16 3 million or 21% over last year, resulting from lower sales and to overall operating expenses returning closer to pre pandemic level as well as additional external storage expenses due to temporary increased level of inventories.

Gross margin remained stable and the EBITDA margin stood at 13% compared to 16% last year.

First half EBITDA reached $110 6 million down 16% as for the EBITDA margin. It stood at 12, 6% compared to $15 one last year.

Second quarter net earnings attributable to shareholders totaled $30 7 million down 25, 6%, mainly due to amortization of right of use assets increased resulting from new business acquisition and expansion projects, mainly in the U S as well as higher interest expense on bank overdraft.

Net earnings per share were <unk> 55, compared to 84 since last year, a decrease of 34, 5%.

First half net earnings attributable to shareholders reached $53 1 million down 25, 6% diluted net earnings per share stood at 95 compared to $1.37 last year.

Cash flow from operating activities before net change in noncash working cap balances was $48 4 million compared to $60 7 million last year net change in noncash working capital items represented a cash inflow of $23 6 million.

Excess inventory started to decline with a positive effect of $49 2 million as a result operating activity operating activities represented a cash inflow of $72 million in the quarter compared to a cash outflow of $3 million last year.

For the first half cash flows from operating activities represented a cash inflow of $88 4 million compared to a cash outflow of $40 5 million last year.

For the second quarter financing activities used cash flow of 50, $15 4 million compared to $21 5 million last year.

Dividends paid to shareholders of the corporation amounted to $8 4 million compared to $7 3 million in the same period of 2022.

First our financing activities used cash flow of $35 1 million compared to 20 $29 eight in 2022.

Dividends paid to shareholders amounted to $16 7 million compared to $14 6 million last year.

During the first half we invested $34 3 million four six business acquisition and $14 3 million for the purchase of equipment to maintain and improve operational efficiency as well as for network expansion projects.

We continue to benefit from a healthy and solid financial position with a working capital of $586 2 million for a current ratio of $2 91, and an average return on equity of 18, 2%.

I'll now turn it over to Richard.

Thank you all again in this transaction.

In this transition year, we are actively walking introducing all inventory levels. Therefore, introducing additional external warehousing space that is impacting our performance.

Edison Twenty-twenty trees, a year of significant investment in our network and these investments will start to bear fruit in 2024.

We will remain focused on market penetration synergies with our disciplined acquisition and innovation.

So this acquisition.

Additional strategies to deliver a good result in the coming quarters.

We will continue to seize and create opportunities where the team the strengths and the asset to consolidate our north American leadership and deliver solid growth over the next period. Thanks, everyone. We'll now be happy to answer your questions.

Yeah, Paul here.

Hello.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear three tone.

Alleging are requesting a question is will it be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the Q. If you are using a speaker phone. Please lift the handset before pressing any case.

One moment. Please for your first question.

First question comes from Amir Patel with CIBC capital markets. Please go ahead.

Hi, good afternoon.

Richard are you able to quantify how much the cost of carrying that excess inventory.

On your EBIT margins in the quarter and when do you expect inventories to normalize.

I will let Antoine complete the answer but just to add the first lens, though.

I'll tell you what I think cost discussing as we speak about $3 million per year, that's a third quarter sorry.

The quarter, sorry, yes, and plus the year, although expenses related to the.

The back and forth of the merchandise that we have to carry between the different warehouses.

And then we can add to that also.

The interest on the on the on.

And the bank overdraft, so we're talking about about over and over $6 million.

For quarter just for to carry these are these additional.

Inventories and to answer the second part of your question I may have basically.

The inventory has started to decline so we're starting to reduce the excess.

Dave We gave we told you guys that the inventory should reduce between $60 million to $80 million. This year and we should see another $50 million next year to bring us more to a more reasonable level of inventories.

Okay. Thanks, and then with respect to EBITDA margins I know in the past you kind of put out.

Some commentary around where you see that longer term.

Figure going just given how much the margins pulled back in this quarter, where once you're through this inventory.

Carrying costs, where would you expect your EBITDA margins to stabilize that.

Yes. This year, we should we should be able to.

Closed the year at.

Around 13% EBITDA, it's all depends of course.

The volume of business, but.

Once we once we clean up the inventory and we reduced the additional external warehousing, we should be anywhere between 13 and 14%.

At 13, 40% okay. Thanks.

That's helpful. And then just with respect to the quarter itself given youre carrying this warehousing costs is it.

How much pricing declines.

Did you experience in that four 7% organic decline in the quarter.

Net experienced any price decline as such but some time for certain item in your inventory we made temporary promotion so basically yes, we.

It does I think our margin, but we don't have any specific prices.

The decrease as such.

Okay Fair fair enough and just the last question I had was.

And when are you able to update us on how the margins at your U S locations today compare to the margins at the Canadian assets.

It's approximately 75% of the Canadian margins.

Louise.

And it keeps improving.

Okay No that's.

That's helpful. Richard just given the all the modernization initiatives, where you know where do you what's the goal for lifting that 75% in coming years.

The goal is to increase also in the U S. We have had.

We have.

A good.

<unk> budget.

Budget with all the managers in the U S, who basically sales should increase because every one of those.

<unk> had been justified because of CS increases because of the market need because we needed that basically to continue our growth in the U S. So we and those new.

Investment so far.

To end up costing whether on a yearly basis, something like $8 million to $10 million and this year, we should see the benefit to cover the cost of this.

Okay, and then I guess a longer term Richard structurally can you if if today the U S locations are 75% of the EBITDA margins of the Canadian locations.

Long term work.

Can they get up to the same as the Canadian locations or is it just a different market and it's going to be structurally.

To some degree lower.

Well, we don't turn that should be very close but for the <unk>.

We see for the short term the medium term that should continue to be at 75%, because we keep making acquisition that made three and four and 5%.

EBITDA margin, so basically we take that treaty to sometimes four years to get those businesses back to the margin close to the distributor margin, but basically we're very optimistic.

Now Jim will continue to improve and we will not stop making equation because it does temporarily ethic of hotel EBITDA margins.

Okay Fair enough. That's all I have for now I'll get back in the queue. Thanks.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.

Your next question comes from Zachary <unk> with National Bank Financial. Please go ahead.

Good afternoon, everyone. Thanks for taking my questions.

Afternoon.

Judy Canadian acquisitions performed better than the U S ones.

No not exactly we we have basically the same situation when you make an acquisition in Canada.

We have exceptional circumstances like we bought for example, transworld distributing an artifact.

Performance is very similar to issue, but are there acquisition that we're making that maybe quick fastener aisle for example at a lower normal EBITDA margin, but now that we have made some changes to just give you. An example, with quick fasteners in the last three months, we see sales increases by 50%. So basically that was a good acquisition and EBITDA margin should be a bug.

At the same level that figure is.

In 2024 in the U S. It's basically the same situation, but could be more slow in the U S. Because we.

We have to have to make more changes sometimes is a cultural change.

And so what you are seeing new production that type of thing, but it's moving forward.

That's good color. Thank you and then my usual question on the M&A pipeline, how is it looking in anything bigger than usual lurking there.

Now pretty much the same thing is that as you've seen us directly in the pipeline.

And in Canada and in the U S. It's still very healthy. So we've completed six so far and we're working on other ones as.

As we speak today sounds good thanks and has the pace of sales trending thus far in Q3.

Yeah in the month of June we have to remember that less last year in 2022, we I'd say has increased.

I think the month of June of 2022 was our best month ever one if I remember well and the sales increase compared to 2021 was 16% as we speak today, we see a decrease of 10% of our sales, which is not bad compared to the performance that we had last year.

Got you and you mentioned that you are not.

Seeing any real.

<unk> declines beyond temporary promotions or are your competitors remaining rational in terms of pricing as they're working through excess inventory.

Yes, I think you had the same situation that we have so basically the new didi they try to do their best in order to decrease their inventory and maximizing our margin as well I think everybody is prudent.

But.

We don't see any pressure.

We don't see any systematic pressure in order to to decrease our example, depressing for an entire product line, except temporary type of institution and tempo with promotions.

That makes sense.

Also on your competitors are you seeing any pinch from higher interest rates on their part maybe p/e backed players slowing down on acquisitions.

No no.

No.

No major change there.

Okay.

So I do know that it is very lumpy, but could you provide any color on what's happening in the retailers market.

Yeah.

Yes, so as we thought it was mark as you know if you look at the home depot, where loss performance of the U S. They are stated are down.

I think they have a decrease of something like 5%, which is not that bad but the unusual moored road on this and what we see.

In Canada, we still have excess inventory and they have over present virtually as well. So I think the and we have I think.

The pace is very slow in Canada, we see the Davita Arrow is just we see now in the current amount that we are starting to buy again.

Because.

The way restaurant rationalizing their inventory, we're not making any changes, but the fund level of situations that we see with the retailers. For example, we haven't let Steve just to give you. An example in Canada at least one competitors of the debt.

Disappear because they've been sold the service was not good enough and the cost of our switches switching older products there to ensure you and we're gaining.

Fastener business as well, but those are those gains are slow because it month to month, we gained so much customer per month, but that should bring good resolved in 2022, though so in Canada.

We believe we really we gained market share and in the U S. We also are gaining some new customers with new products as well, but all of these things and it takes forever to make changes in the stores our customers, we expect that to happen.

Notable impact in 2024, both in Canada, and the U S.

That's great information thank you.

One last one for me you have the new investments coming online costing about eight to 10 million.

You have about $6 million a quarter in costs related to the additional inventories thats going to come off have you gradually worked through.

The excess inventory is there in terms of timing.

Is there further downside from where we were in Q2 that 13% level.

Due to a mismatch in additional costs coming in versus cost coming out or should we see it tick up from here for the rest of the year.

You should see.

You will you should not see a reduction in EBITDA margin.

So we're working through the external warehousing so way it should.

You should see you should see some improvement on the margin slow improvement because it's it takes time to to resolve to clean up.

With the external warehousing, but you should see improvement on lastly, the volume goes down so its distribution you know why it works so if volumes reduces the.

EBITDA reduces but no surprise on the cost side.

Perfect. Thank you very much I'll turn it over.

Thank you Eric.

There are no further questions at this time. Please proceed.

Thank you very much have a nice day.

Sure.

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

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