U.S. Markets closed

Edited Transcript of RCH.TO earnings conference call or presentation 3-Oct-19 6:30pm GMT

Q3 2019 Richelieu Hardware Ltd Earnings Call

ST-LAURENT Oct 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Richelieu Hardware Ltd earnings conference call or presentation Thursday, October 3, 2019 at 6:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Antoine Auclair

Richelieu Hardware Ltd. - VP & CFO

* Richard Lord

Richelieu Hardware Ltd. - CEO, President & Executive Director

================================================================================

Conference Call Participants

================================================================================

* John Paul Novak

Connor, Clark & Lunn Investment Management Ltd. - Partner, VP, and Portfolio Manager

* Zachary Evershed

National Bank Financial, Inc., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Third Quarter 2019 Results Conference Call. (Operator Instructions) Note that this call is being recorded on Thursday, October 3, 2019. (foreign language)

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [2]

--------------------------------------------------------------------------------

Merci. Good afternoon, ladies and gentlemen, and welcome to this Richelieu's conference call for the third quarter and nine-month period ended August 31, 2019. With me is Antoine Auclair, CFO.

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

Richelieu performed well in the third quarter, as shown by increases in sales, EBITDA, net earnings and cash flows compared to last year. Note that the third quarter had 1 less business day than last year, negatively impacting sales by 1.5%.

Despite a softer market in Canada, our growth was fueled by the contribution of our 5 acquisition made over the past 12 months, namely Euro Architectural Components, Lion Industries, Blackstone Building Products, Truform Building Products and Chair City Supply. Together, they posted a good performance in our manufacturers market, both in Canada and in the U.S. The manufacturers' market softness is felt across Canada, but more importantly in Alberta and the Atlantic provinces.

As for the retailers market in Canada, as mentioned in previous quarters, the store closures, the inventory realignment of our retail customers combined with the softer market had a negative impact on our sales. Cyclical sales were also lower this quarter. However, we are particularly pleased with our U.S. performance where our sales increased by 8.2%, including acquisition, and also by the continued improvement in our margins in this market. Our consolidated EBITDA margin, as a percentage, slightly increased as a result of rigorous control on gross margins as well as operational costs.

I will come back with additional information comments, but I will now ask Antoine to go through the financial highlights. Antoine?

--------------------------------------------------------------------------------

Antoine Auclair, Richelieu Hardware Ltd. - VP & CFO [3]

--------------------------------------------------------------------------------

Thanks, Richard. Third quarter sales reached $269 million, up by 3.4%, of which 5% from acquisition and 1.6% from internal decrease. In Canada, sales amounted to $180 million, up by 0.7%, of which 4.7% from acquisition and 4% from internal decrease. Our sales to manufacturers reached $147.9 million, up by 3%. As for the hardware retailers and renovation superstores market, sales stood at $32 million, down 8.8%.

In the U.S., sales totaled USD 67.5 million, an increase of 8.2%. Sales to manufacturers reached USD 64.9 million, an increase of 8.9%, of which 3.1% resulted from internal growth and 5.8% from acquisitions. Sales to hardware retailers and renovation superstores were down 10.3%, however, are showing year-to-date growth of 10.8%.

Total sales in the U.S. reached CAD 89.3 million, an increase of 9.2%, and represented 33% of total sales. For the first 9 months of 2019, sales totaled $777 million, up 4.2%, 0.4% from internal growth and 3.8% from acquisitions.

In Canada, sales reached $507 million, up by $3.3 million or 0.7%, of which 2.7% resulted from acquisitions and internal decrease of 2.1%. Sales to manufacturers rose to $417.6 million, up by $12.9 million or 3.2%, mostly resulting from acquisitions. Sales to hardware retailers and renovation superstores reached $89.1 million compared to $98.7 million, down 9.7%.

In the U.S., sales amounted to USD 203 million, up by 7.5%, 1.6% from internal growth and 5.9% from acquisitions. They reached CAD 270 million, up 11.5%, accounting for 34.8% of total sales. Sales to manufacturers totaled $185.3 million, an increase of $12.5 million or 7.2% over the same period last year, of which 0.8% resulted from internal growth and 6.4% resulted from acquisitions.

As reported in previous quarters, the internal growth in the manufacturers' market was affected by the termination of a supply agreement with a major customer. Note that at comparable sales level, internal growth in the U.S. manufacturers' market would have been 3.4%. Sales to hardware retailers and renovation superstores were up 10.8% versus 2018.

Third quarter EBITDA reached $30.2 million, up by $1.3 million or 4.3% over last year. Gross margin and EBITDA margin improved slightly. The EBITDA margin stood at 11.2% compared to 11.1% last year. For the first 9 months, EBITDA reached $78.3 million, up 2%. The gross margin remained stable. As for the EBITDA margin, it stood at 10.8 -- 10.1% compared to 10.3% last year. The EBITDA was impacted by the slowdown in the hardware retailer market in Canada and market development costs incurred to increase our offering and our presence in the retailers' market in the U.S.

Third quarter net earnings attributable to shareholders totaled $18.6 million, up 1.3%. Net earnings per share were $0.33 basic and diluted, an increase of 3.1%. For the first 9 months, net earnings attributable to shareholders reached $48 million, down 2.6%. Diluted net earnings per share stood at $0.84.

Third quarter cash flow from operating activities before net change in working capital balance amounted to $23.4 million or $0.41 per share, an increase of 4.3%. For the first 9 months, they were up 0.6% totaling $61 million or $1.06 per share.

For the third quarter of 2019, dividend paid amounted to $3.6 million, up by 4.4%. Since the beginning of fiscal year, we repurchased common shares for $9.4 million, including $4.9 million during the third quarter.

During the first 9 months, we paid dividends of $10.8 million, up by 4.3%. We also invested $28.4 million for business acquisitions and $7.6 million, primarily for equipment to maintain and improve our operational efficiency. We continue to benefit from a healthy and solid financial position, cash balance of $14.8 million, almost no debt, a working capital of $346.8 million for a current ratio of 4.5:1.

I now turn it over to Richard.

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [4]

--------------------------------------------------------------------------------

Thank you, Antoine. Our ongoing innovation and market penetration strategies enable us to grow in various market segments. Our development efforts in specialized market such as door and window hardware, closet, glass hardware, architectural hardware and stainless steel components for stairs, banisters and railings were reinforced by our recent acquisition resulting in a 20% sales growth in this market. We continue to improve our operational efficiency and customer service.

Our AutoStore system implemented last year continues to deliver as per expectation. This robotic system is highly effective, reliable and provides Richelieu with a significant competitive advantage. We just launched a new project to expand the current AutoStore footprint to add up to 5,000 product location. This will require an investment of about $500,000.

Speaking about competitive advantage, we also are constantly investing in our unique website which is largely used by our customers, and the website is a very important contributor to our success. We are also proud to increase our presence and seize new market opportunity in the important New York market where we are moving our Long Island City location to a larger one in the same area. It would be a key location that will include a state-of-the-art and welcoming showroom available for our customers and New York architectural designers.

Turning to our outlook. We remain focused on outstanding customer service; market share gain in Canada and the U.S.; the new synergies, operational efficiencies and profitability; and new acquisition opportunity compatible with our growth objective. We remain confident that our strategies of ongoing innovation, market development and acquisition will continue to bring good result and end the year with a strong and stable financial position.

We have grown this company to $1 billion of sales over $100 million of EBITDA with no debt. Our priority is to continue on the path of growth by entering that we always have the strategies, human resources and system in place in order to keep our leadership and remain a strong, innovative and customer-driven company.

Thanks, everyone. We'll now be happy to answer your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question will be from Zachary Evershed at National Bank Financial.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [2]

--------------------------------------------------------------------------------

I was hoping you could speak more about the AutoStore expansion. What is being added?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [3]

--------------------------------------------------------------------------------

We just add locations. We're going to add about the possibility of storing between 5,000 and 7,000 more products into the AutoStore. The result of that will be to increase our operational efficiency as well as to shorten our delivery time which is the fastest way to deliver the type of product that we're selling at Richelieu. So that will add to our competitive advantage as we'll do expedite our deliveries and save cost.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [4]

--------------------------------------------------------------------------------

That's helpful. And this actually might my tie into that. U.S. sales made up a larger portion of consolidated sales versus the same quarter last year, and you have indicated in the past that your U.S. margins are generally lower than your margins in Canada, yet this quarter, despite softening markets and growing exposure in the U.S., margins increased 10 basis points year-over-year on EBITDA. So could you provide us with some insight into where that's coming from?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [5]

--------------------------------------------------------------------------------

It's only a -- I think it's a -- that's the result of a rigorous control of our margins, and not to name our selling prices as well as the operational costs as also we are working hard in order to save on the cost of freight, which is actually quite expensive in North America -- I mean, all over the world. So basically, I think, we have a good team in the U.S. They have a good plan, and they drive the business the way it should be driven.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [6]

--------------------------------------------------------------------------------

And do you think that there is more you can extract there?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [7]

--------------------------------------------------------------------------------

There will always be more to extract.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [8]

--------------------------------------------------------------------------------

Moving on to the activity in Canada, which has been poor year-to-date. Have you seen any signs of end markets turning a corner?

--------------------------------------------------------------------------------

Antoine Auclair, Richelieu Hardware Ltd. - VP & CFO [9]

--------------------------------------------------------------------------------

No. The softness in the third quarter was felt pretty much all across Canada. But like we said, it's more importantly in the Atlantic provinces and also the -- in Alberta.

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [10]

--------------------------------------------------------------------------------

Yes, Alberta is down by something like 10%. Québec would still be up compared to last year, and as well as BC. The rest of the market are slightly negative, including Ontario, which is down by 4%. But I don't want to confuse you with some other information, but I can tell you though that, including acquisition in the east, sales increased by 6%, Ontario increased by 9.7%, as a result mainly of the latest acquisition. Western Canada will be decreasing by only 0.3% compared to 3.5% without acquisitions. So overall, in Canada, as mentioned in Antoine's report, sales increased by 3.1%. So basically we're quite happy with the results, including our acquisitions.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [11]

--------------------------------------------------------------------------------

That's very helpful. Any sign of things turning around in the months since the quarter ended?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [12]

--------------------------------------------------------------------------------

No, I would say it's up totally for the manufacturers' market. But I think regarding the retailer market, in the first quarter of the following fiscal, I think we're going to see improvement. It cannot be worse. Because we know the percentage of sales or the sale performance per POS for our big retailing customers, and actually we see there is a big difference between their purchases and their POS performance. So that means that they keep reducing and realign their inventory. So that cannot last forever. So we expect that to be improving in the future quarters. Then eventually, it would be back to normal.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [13]

--------------------------------------------------------------------------------

So of that -- okay.

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [14]

--------------------------------------------------------------------------------

Except for the store closure. For those that have closed, we don't expect them to reopen.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [15]

--------------------------------------------------------------------------------

That's fair. Then of the impact that we're seeing on the retailer front, how much do you think is attributable to the inventory rightsizing and how much is end-market slowness?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [16]

--------------------------------------------------------------------------------

I would say it's 80% in inventory realignment. The rest is in the soft market. Yes.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [17]

--------------------------------------------------------------------------------

Excellent. And we have brought this up in the past, but the Home Depot new self-pickup lockers are seeing positive reactions. Are you seeing an impact on your sales or have any customer mentioned it?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [18]

--------------------------------------------------------------------------------

No. No. It doesn't have an impact with us.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [19]

--------------------------------------------------------------------------------

That's clear. Moving on to the M&A pipeline, always an important topic. How is it looking these days?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [20]

--------------------------------------------------------------------------------

Exciting. So we're busy. And we keep working hard, and we -- and if the business become more difficult, that would be just setting more possibility of acquisition. But for the time being I think this is a very healthy...

--------------------------------------------------------------------------------

Antoine Auclair, Richelieu Hardware Ltd. - VP & CFO [21]

--------------------------------------------------------------------------------

Pipeline.

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [22]

--------------------------------------------------------------------------------

List of acquisition that we have on our tables, and we will probably make other moves very soon.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [23]

--------------------------------------------------------------------------------

And any context of a weaker market in Canada? Do you think that may cause an acceleration of the pace of M&A?

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [24]

--------------------------------------------------------------------------------

Yes. That will certainly be favorable to that.

--------------------------------------------------------------------------------

Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [25]

--------------------------------------------------------------------------------

Excellent. And one last one for me then. How did the various end markets perform? Any weak spots in your manufacturer end markets?

--------------------------------------------------------------------------------

Antoine Auclair, Richelieu Hardware Ltd. - VP & CFO [26]

--------------------------------------------------------------------------------

No. The -- it was pretty steady in all of our markets, Zach.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) And your next question will be from John Novak at CCL.

--------------------------------------------------------------------------------

John Paul Novak, Connor, Clark & Lunn Investment Management Ltd. - Partner, VP, and Portfolio Manager [28]

--------------------------------------------------------------------------------

Antoine, can you just talk to the working capital. It looks like you've taken a lot out of both inventory and receivables. How do you see the rest of the year playing out from a working capital perspective?

--------------------------------------------------------------------------------

Antoine Auclair, Richelieu Hardware Ltd. - VP & CFO [29]

--------------------------------------------------------------------------------

Yes. Usually, the fourth quarter is pretty neutral. So third quarter is usually favorable, but also if you remember, in last -- in the second quarter, we had the very large sales to -- very large cyclical sale. So basically we got the receivables in during the third quarter, and we're also working very hard to reduce the inventory, but I'm not expecting a major reversal in the fourth quarter. So the major reversal, we got it in the third quarter. So it should be neutral in the fourth quarter and usually, the first quarter is where you invest in your inventory in order to capture the busier market in the spring.

--------------------------------------------------------------------------------

John Paul Novak, Connor, Clark & Lunn Investment Management Ltd. - Partner, VP, and Portfolio Manager [30]

--------------------------------------------------------------------------------

Okay. And lastly, should we expect the same pace of use on the normal course issuer bid in the next quarter?

--------------------------------------------------------------------------------

Antoine Auclair, Richelieu Hardware Ltd. - VP & CFO [31]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

(Operator Instructions) And at this time, we have no other questions. So I would like to turn the conference back over to Richard Lord. Please go ahead, sir.

--------------------------------------------------------------------------------

Richard Lord, Richelieu Hardware Ltd. - CEO, President & Executive Director [33]

--------------------------------------------------------------------------------

Thank you very much, and it's always a pleasure to talking to you. So we'll be in our office if you have further questions. It was a pleasure to talk to you. Have a good afternoon.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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.