Richelieu Hardware Ltd. (OTCPK:RHUHF) Q2 2024 Earnings Conference Call July 11, 2024 2:30 PM ET
Company Participants
Richard Lord – CEO
Antoine Auclair – CFO
Conference Call Participants
Amir Patel – CIBC Capital Markets
Zachary Evershed – National Bank
Operator
Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware 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 only. [Operator Instructions] This call is being recorded on July 11, 2024. [Foreign Language]
Richard Lord
Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu’s conference call for the second quarter and first half ended May 31, 2024. With me is Antoine Auclair, CFO. As usual, note that some of today’s issues include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings.
We continue to make good advances in the second quarter, thanks notably to the valuable contribution of our acquisitions, the strong support of our market development strategy, and our value-added service. As a result, we achieved an increase in sales over the comparative quarter of 2023, which is appreciable in the current market condition. This rise reflects the good performance in our manufacturers’ market, especially in the U.S., with a growth of 8.7% in the quarter.
Our sales retailers and renovation superstores were down in Canada and U.S., resulting from a softer market and the impact of some price reduction. Nevertheless, we are currently working on many interesting projects with retail customers, that will generate additional sales in the coming periods. In addition, the centralization projects in Western and Eastern Canada will continue to support our growth in this market.
We also focus on the ramp-up and development of our centers that we were expanding and modernizing in 2023. We are happy with this investment that were implemented to better service our customers, support our growth, and access new territories. We already see significant increase in sales versus last year in all of these projects.
And now, I hand it over to Antoine for the financial review of the quarter and first half.
Antoine Auclair
Thanks, Richard. Second quarter sales reached $407 million, up 2%, resulting from a positive contribution from the acquisition of 2.7%, and an internal decrease of 0.7%. In Canada, sales amounted to $276 million, down 1.1% of which 2.8 from internal decrease, partially offset by a 1.7% positive contribution from acquisitions.
Sales to manufacturers reached $232 million, up 0.9%, and for the hardware retailers, sales stood at $44 million down 10.6%. In the U.S., sales grew to $150 million in, up 6.1%. Sales to manufacturers reached $143 million, up 8.7%, and hardware retailers and renovation superstores market, sales reached $7.4 million, down $2.9 million.
In Canadian dollars total sales in the U.S. reached CAD205 million, an increase of 6.5%. For the first half, sales reached $888 million, up 1.5% of which 0.5% from internal decrease, offset by 2% from acquisition. In Canada, sales reached $508 million slightly down by $2.1 million or 0.4% of which 2.2% from internal decrease and 1.8% from acquisitions.
Sales to manufacturers reached $420 million, up $4.3 million or 1%. Sales to hardware retailers and renovation superstores reached $88.2 million compared to $94.6 million, down 6.8%. In the U.S., sales amounted to $280 million, up 4% of which 1.7% from internal growth and 2.3% from acquisition. It reached CAD380 million, up 4.2%, accounting for 43% of total sales. Sales to manufacturers totaled $264 million, an increase of $13.5 million or 5.4%, of which 2.9% from internal growth and 2.5% from acquisitions. Sales to hardware retailers and renovation superstores were down 14% compared to last year.
Second quarter EBITDA reached $53.8 million, down $7.7 million or 12.6% over last year. Gross and EBITDA margins continued to be under pressure due to temporary factors, including inventories at higher than current purchasing costs, lower selling price for certain products originating mainly from Asia, plus the temporary impact resulting from the expansion projects. Consequently, EBITDA margins stood at 11.2% compared to 13% last year. First half EBITDA reached $94.2 million, down 14.8%. As for the EBITDA margin, it stood at 10.6% compared to 12.6% last year.
Second quarter net earnings attributable to shareholders totaled $23.4 million, down 23.7%, mainly due to amortization resulting from new business acquisitions and expansion projects. Net earnings per share were $0.42 compared to $0.55 last year, a decrease of 23.6%. First half net earnings attributable to shareholders reached $38.7 million, down 27.2%. Diluted net earnings per share stood at $0.69 compared to $0.95 last year.
Cash flows from operating activities before net change in non-cash working capital balances was $45.1 million compared to $50.8 million last year. Net change in non-cash working capital items generated a cash inflow of $10.7 million. Inventories continue to reduce as planned with a positive effect of $22 million this quarter. As a result, operating activities provided a cash inflow of $55.7 million in the quarter, compared to a cash inflow of $74.4 million in 2023.
For the first half, cash flows from operating activities represented a cash inflow of $56.2 million compared to a cash inflow of $93.2 million last year. For the second quarter, financing activities used cash flow of $38.6 million compared to $17.8 million last year. During the quarter, the corporation paid lease obligation of $10 million, distributed dividends of $8.4 million, and paid interest on bank overdraft of $700,000. During the quarter, we also repurchased 481,000 common share for $18.6 million.
First half financing activities used cash flow of $57.6 million, compared to $29.8 million in 2023. During the first half, we invested $36.2 million, $17 million for the three business acquisition, and $19.2 million primarily for investment related to the consolidation of our new Calgary warehouse, and the purchase of equipment to maintain and improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of $616 million for a current ratio of 3.3:1 and almost no debt.
I now turn it over to Richard.
Richard Lord
Thank you, Antoine. First, I’d like to say something about the situation in our Montreal warehouse, where last month some 125 employees, whose collective agreement expired last December went on strike. We have taken appropriate measures to ensure that all our local customers continue to be served, thanks to the contingency plan we have put in place. It has to be noted, that the strike affects just one of our 114 distribution centers and a small portion of our 3,000 employees. We are confident that a mutually beneficial agreement will be reached very soon.
To conclude, we will continue to focus on the development of our expanded and modernized distribution centers in the U.S., as well as our new Calgary location, which enables us to effectively support growth of our manufacturers’ market, in addition to centralizing the distribution of all products for retailers in Western Canada. As well, we will pursue our projects undertaken in the second quarter regarding the consolidation of our distribution activities for retailers in Ontario and Eastern Canada.
We are well-positioned to seize new opportunities in the renovation market and to benefit from the expected increase in demand in the context of the housing shortage in Canada and in the U.S. Our focus is on profitable growth. This means keeping tight control over our costs and pursuing our winning strategies of innovation, service, and acquisition.
Thanks, everyone. We’ll now be happy to answer your question.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Amir Patel from CIBC Capital Markets. Please go ahead.
Amir Patel
Hi. Good afternoon. Richard, are you able to share how your year-over-year sales are tracking in Q3 to date for both manufacturers and retailers?
Richard Lord
Yes, let me get my report. I have that not very far from me. Regarding the kitchen cabinet market, we are flat compared to last year, which is a positive sign. Kitchen cabinet, manufacturers represent about 40% of our sales. Interesting to mention that the commercial innovation, which consists of the mid-work (ph) and commercial projects, is increasing in total by 4.3%, including 6% in the U.S., that’s very positive.
Other specialized market that is, including what we call the closet market, we operate by 5% of all over North America. So it’s pretty positive, and we see that the downside, though, on the door and window manufacturers, which is typically related to the new construction, and the residential and office furniture that are down for many reasons that we know about office furniture may be because of the people working from home.
So basically, these are positive signs that, our manufacturers’ market is behaving quite well. The retailers, as a matter of fact, remains down, but we expect this market to improve, because of the many projects that we have undertaken with many of our retail customers, we have new products that came out in the Home Depot stores in Canada three months ago. We have a new project with Home Depot that will be delivered next fall, I mean, October, November.
Many new projects with [indiscernible]. Now, that they have a new Executive that has taken place, a new President, new Vice President, so basically their mandate is to revive that company that has been, I would say, sleeping for a few years because of what you knew, that those wanted to sell its operation in Canada. So basically, we have many positive signs that give us a clear demonstration that the future looks great with the retailers in Canada.
In the U.S., unfortunately, our sales are down, because we have lost one customer, but we are in the process of compensating those sales — those lost sales with new customers. What happened with the customers I’m talking about is because they have decided to buy their own products overseas, that’s their choice, we don’t think it’s a good choice, but this is what they have decided. But we think before the end of the year, we should have recaptured that business with other customers.
Antoine Auclair
And, Amir, that’s pretty much what we’re seeing since the beginning of Q3 as well, so the trend is pretty similar so far.
Amir Patel
Okay. Thanks. Thanks, Antoine. And Richard, that customer you mentioned that you lost in the U.S., is that — that was a retailer customer?
Richard Lord
Yeah. It is a retail customer, yes. I was talking about the retail market, yes.
Amir Patel
Perfect. And all the figures that you ran through, appreciate all that, was that organic or is that kind of…
Richard Lord
Organic only, Organic only, not including any acquisitions.
Amir Patel
Okay. That’s very helpful. And then, Richard, just turning to, in Q2, you had a 0.7% organic decline, how much of that was weaker volumes and how much was maybe some price deflation? Because I know you highlighted pricing on products from Asia were down a bit.
Richard Lord
I will let Antoine try.
Antoine Auclair
Yeah. If you go a bit more in detail, if you look at the reduction in the Retail business in Canada, it’s pretty much coming, all of it from price reduction. The rest — we have some price reduction in the Industrial business, but not necessarily material, but the one big ticket item regarding price reduction hits the Retail business in Canada, and it’s pretty much all coming from there.
Richard Lord
And mainly for the product that we are importing from Asia.
Amir Patel
Okay. So volumes were pretty stable year-over-year?
Richard Lord
Yeah. In quantity, the product sold, it’s stable.
Amir Patel
Yeah. Okay. And then, Richard, as you look out over the next 18 months, I know Asia is a small piece of your product mix, but are you seeing any signs of perhaps upward price momentum, because I think for most of your products, there hasn’t been any price increases for some time.
Richard Lord
You’re absolutely right, and our operating costs continue to increase, the salary continue to increase, as well as the price of the rents, the leases that we have to — that we have to pay. I feel that the market will start to increase its pricing, mainly the product from Europe and from America should start to increase. We’ve seen that with the finishing products, the lackers, (ph) what we call the paint for the wood product that we sell.
So we had our first price increase last month and expect that the North American products and European products will start to increase early next year. That’s not only a hope, I think, these guys also had their operating cost increasing, and they’re going to have to do something. Asia is still slow. The only problem with Asia is that they have not much to do as we speak. So they don’t increase their price, but that could change very quickly.
Amir Patel
And, Richard, if you see price increases on the Europe and Asia products, are you getting a sign from your suppliers as to the scale of those increases that they might be looking to realize?
Richard Lord
Not yet. I was meeting with important customers a couple of days ago, which is Bloom, which is a huge supplier, they have a price increase in mind, but they would not, say, put any number on the table as we speak. So basically, I cannot answer clearly that question.
Amir Patel
Okay. Fair enough. That’s all I had for now. I’ll get back in the queue. Thanks.
Operator
[Operator Instructions] Your next question comes from Zachary Evershed from National Bank Financial. Please go ahead.
Zachary Evershed
Thank you. Congrats on the quarter, everyone.
Richard Lord
Thank you.
Antoine Auclair
Thank you.
Zachary Evershed
In terms of the rationalization of the cost base that you guys are entertaining in Eastern Canada and Ontario, do you think you give us a breakdown of the cost savings that you’re expecting, perhaps by bucket?
Richard Lord
First, saving is important. I will let Antoine answer that question, but I would say — I would like to make a few comments regarding the effect on our customers. Because what we are doing, we’re centralizing some distribution centers that are mainly servicing the hardware retailers.
In the Retail market, Richelieu’s got something like six different product line, which as we speak, are distributed through six different warehouses, because these are the result of many acquisitions that we’ve made in the past. So when we centralize that, what we do for the customer, for the small customers, because at the Retail business, we sell to an owner, for example, to Home Depot and home hardware, and those customers, they buy through their distribution centers, which is easy, can be shipped from any warehouse.
But for the small customers, that want to make a — place a purchase order at Richelieu, we have six different products coming from six different warehouses, that means that we have six different prepaid. In order to have their freight for free, they have to buy $500 each of the product line, which is a burden for the small customers. So now, since we combine everything at the same place, the same prepaid order, $500, applies for all the products.
So that will create more sales, because the customers, they don’t have that benefit from others, from our competitors, and it will make their life easier in order to manage their stores, and it will save money as we will, because while combining those distribution centers, we save on operating costs, and we save on the product handling and everything else because we still use the same salesforce, the difference would be in the labor force, in the warehouse. Antoine?
Antoine Auclair
Regarding cost reduction, Zach, we’re talking about close to $1.5 million in terms of reduction in costs and another $1.5 million when we’ll be able to exit the location that we’re in, so that should be happening before now and the end of the year. So close to $3 million next year.
Zachary Evershed
And those are annual numbers now quarterly, right?
Antoine Auclair
Yeah, annual numbers.
Zachary Evershed
Perfect. And then would you be able to quantify the dollar impact of the strike in Montreal, or would it not be material?
Richard Lord
We don’t think it would be material. We don’t have any — first of all, I said that it would be fixed very shortly, and we don’t see that should be very detrimental to our sale, because the contingency plan is very effective, and we have used our Mississauga, Ottawa, our Quebec, Moncton, and Nova Scotia warehouse in order to continue to serve a customer effectively. The non-unionized people here were working in the warehouse in Montreal, they did a fantastic job.
These guys are very efficient. They have learned very fast how to do the job and it was amazing to see the autosar (ph) and the conveyors running and getting the box — the boxes out of that warehouse. So we don’t expect any huge benefit, but it’s still early to evaluate all the impact. Antoine, what do you think?
Antoine Auclair
No, no, you’re correct. We were monitoring the lines shipped all across our network versus what we were shipping before, so we haven’t seen major impact. There will be a small impact, of course, that’s for sure, but nothing material from our point of view as we speak.
Zachary Evershed
That’s helpful. Thanks. And then my line did cut out for a moment, so apologies, if this has already been asked, but have your expectations for margin levels for 2024 changed at this point in time?
Richard Lord
So, as you can see, second quarter is pretty aligned with the first quarter. The gap between them, the EBITDA margin last year reduced in the second quarter, so it’s going to reduce as well in the third and the fourth quarter. It’s going to improve. The second half should be better than the first half, that’s for sure. And next year, if — when we’re going to see the market coming back, we should also see an improvement in margin if the market is improving.
Zachary Evershed
Thank you for the color. That’s it for me. I’ll turn it over.
Operator
And there are no further questions at this time, I will turn the call back over to Richard Lord for closing remarks.
Richard Lord
There’s no more questions. Thanks again. It’s always a pleasure to talk to you. Do not hesitate to contact us for more information. Thank you very much. Have a good afternoon.
Operator
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
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