Richelieu Hardware Ltd (TSX:RCH.TO) reported a 1.9% increase in sales to $407 million for the third quarter ending August 31, 2024, despite facing challenges in the market. The company's growth was primarily driven by acquisitions, while internal sales saw a slight decline.
Key Takeaways:
• Q3 sales reached $407 million, up 1.9% year-over-year
• EBITDA decreased by 13.2% to $53 million
• Net earnings attributable to shareholders fell 23.9% to $22.7 million
• Four new acquisitions in progress, expected to add $40-60 million in revenue
Company Outlook
• Anticipating recovery in renovation and repair market
• Pursuing four new acquisitions to boost revenue
• Optimistic about future growth prospects
• Focusing on network optimization initiatives
Bearish Highlights
• Internal sales decreased by 1.3%
• Canadian sales down 2% to $265 million
• EBITDA margin declined to 11.3%
• Earnings per share decreased to $0.41
Bullish Highlights
• U.S. sales increased 4.8% to US$148 million
• Acquisitions contributed 3.2% to overall growth
• Strong working capital position at $632 million
• Current ratio of 3.5:1 with minimal debt
Misses
• Net earnings for the first nine months of 2024 down 26% to $61.4 million
• Loss of a significant U.S. customer in Q2
Q&A Highlights
• Addressing customer losses with new sales strategies
• Expecting price increases from North American and European suppliers
• Anticipating improved margins due to competitive pricing from Asian suppliers
• Modernization and expansion costs expected to ease by early 2025
Richelieu Hardware Ltd reported mixed results for its third quarter, with overall sales growth despite challenges in the market. The company's CEO, Richard Lord, emphasized the importance of acquisitions in driving growth, with four new acquisitions expected to add between $40 million and $60 million in revenue by the end of 2024.
While the company faced headwinds, including a decrease in internal sales and the loss of a significant U.S. customer, Richelieu remains optimistic about future growth. The company is actively working to regain lost volumes through new customers and is exploring potential acquisitions to strengthen its position in the U.S. market.
The hardware distributor reported a strong working capital position of $632 million and a current ratio of 3.5:1, indicating financial stability. However, the company experienced a decline in EBITDA and net earnings, which management attributed to temporary factors affecting margins.
Looking ahead, Richelieu anticipates a recovery in the renovation and repair market and expects to benefit from competitive pricing offered by Asian suppliers. The company also plans to refine its U.S. market strategy and continue its network optimization initiatives.
As Richelieu Hardware navigates through market challenges, it remains focused on growth through acquisitions and improving operational efficiency. The company expects to see relief from modernization and expansion costs by early 2025, which could potentially improve its financial performance in the coming quarters.
Full transcript - None (RHUHF) Q3 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Third Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, which will be restricted to analysts only. [Operator Instructions] Also note that this call is being recorded on October 10, 2024. [Foreign Language]
Richard Lord: Merci. Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter and first nine months ended August 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. Overall, we had a good third quarter where we achieved sales growth and maintained a healthy and solid financial position, considering the soft demand in the R&R and the new housing market. Total sales growth for the quarter reached 1.9%, partially fueled by our strong performance in the U.S. manufacturers market where sales increased by 7.5% in U.S. dollar, driven by the significant impact of our acquisitions. As for the retailer and renovation superstore market, we continued to see lower sales compared to last year, mainly due to the price deflation and lower demand in this market. Our margins continued to be under pressure from temporary factors as it was the case in previous quarters, notably, the charge of inventory purchased at higher than current costs, lower selling prices for certain products and operating expenses related to our expansion projects. During the quarter, we pursued our network optimization initiative by consolidating two of our new centers -- of our centers in the New York area and on the West Coast of Florida. I'll now hand it over to Antoine for the financial review of the quarter.
Antoine Auclair: Thanks, Richard. In the third quarter, sales reached [$407 million] (ph), up 1.9%. This growth was driven by a positive contribution from acquisition of 3.2%, partially offset by an internal decrease of 1.3%. In Canada, sales totaled $265 million, down 2%. This decline was mainly due to a 3.5% internal decrease, partially offset by a 1.5% positive contribution from acquisitions. Sales to manufacturers amounted to $222 million, up 0.5%, while sales to hardware retailers stood at $43 million, down 13.4%. In the U.S., sales grew to US$148 million, up 4.8%. Sales to manufacturers reached $141 million, up 7.5%. In the hardware retailers and renovation superstore market, sales reached $7.1 million, down $3.1 million. In Canadian dollar, total sales in the U.S. reached CA$203 million, an increase of 7.5%. For the first nine months, total sales reached $1.4 billion, up 1.6%, of which 0.8% resulted from internal decrease, offset by 2.4% contribution from acquisitions. In Canada, sales reached $773 million, slightly down by 1%. This was driven by a 2.7% internal decrease, partially offset by 1.7% contribution from acquisitions. Sales to manufacturers totaled $642 million, up $5.3 million or 0.8%. Sales to hardware retailers and renovation superstores were $131 million compared to $143.9 million, down 9%. In the U.S., sales amounted to US$429 million, up 4.3%, with 0.9% attributable to internal growth and 3.4% from acquisitions. They reached CA$583 million, up 5.3%, accounting for 43% of total sales. In U.S. dollar, sales to manufacturers totaled US$405 million, an increase of US$23.4 million or 6.1%, driven by 2.5% internal growth and 3.6% from acquisitions. Sales to hardware retailers and renovation superstars were down 19.7% compared to last year. Third quarter EBITDA reached $53 million, down $8 million or 13.2% over last year. Gross and EBITDA margin remained under pressure due to temporary factors, including inventories at higher than current purchasing costs, lower selling prices for certain products, primarily sourced from Asia, and the temporary impacts of consolidation and expansion initiatives. Consequently, the EBITDA margin stood at 11.3% compared to 13.3% last year. For the first nine months, EBITDA totaled $147.2 million, down 14.2%, with the EBITDA margin at 10.9% compared to 12.9% last year. Net earnings attributable to shareholders in the third quarter amounted to $22.7 million, down 23.9%, mainly due to amortization associated with new business acquisitions and expansion projects. Net earnings per share were $0.41 compared to $0.53 last year, a decrease of 22.6%. For the first nine months, net earnings attributable to shareholders reached $61.4 million, down 26%. Diluted net earnings per share stood at $1.09 compared to $1.47 last year. Cash flow from operating activities before net change in non-cash working capital were $42.7 million compared to $49.8 million last year. The net change in non-cash working cap items generated cash flow of $7.5 million. As a result, operating activities provided a cash inflow of $50.2 million in the quarter compared to a cash inflow of $104.8 million in 2023. For the first nine months, cash flows from operating activities represented a cash inflow of $106.4 million compared to a cash inflow of $198 million last year. For the third quarter, financing activities used cash flow of $18.4 million compared to $18.2 million last year. During the quarter, we paid lease obligation of $10.5 million and distributed dividends of $8.4 million. For the first nine months, financing activities used cash flow of $76.1 million compared to $58 million in 2023, with the variance primarily attributable to common share repurchase amounted to $18.6 million this year compared to $800,000 last year. In the first nine months, we invested $42.4 million, including $17.6 million for three business acquisition and $25.4 million, primarily for investment related to our consolidation and expansion projects, including our new Calgary location and the purchase of equipment to maintain and improve operational efficiency. We continue to maintain a solid financial position with working capital of $632 million and a current ratio of 3.5:1, while holding almost no debt. I now turn it over to Richard.
Richard Lord: Thank you, Antoine. We are pursuing our acquisition strategy as we signed agreement in principle in the third quarter in view of four new acquisitions, two in Canada and two in the U.S. We feel confident about achieving good future performances considering that the current housing shortage in North America is offering a great potential of growth for Richelieu and that the R&R market is expected to recover in the coming months. We are committed to seize this opportunity. We benefit from a strong positioning with a robust network, unmatched offering, expert team, outstanding website, a distinctive service appreciated by customers in our diversified segments, and we have a solid innovative drive in all the growth sector of residential and commercial renovation. Thanks, everyone. We'll now be happy to answer your questions.
Operator: Thank you. [Operator Instructions] And your first question will be from Hamir Patel at CIBC (TSX:CM) Capital Markets. Please go ahead.
Hamir Patel: Hi, good afternoon. Richard, if you're successful in completing those four acquisitions, would you expect that to be completed in the fourth fiscal quarter? And what would be the total revenues associated with the four deals?
Richard Lord: Yes, it will be settled before the end of the third quarter. And Antoine, just do you have a precise number of the...
Antoine Auclair: Yeah, before the end of the fourth quarter or slightly after that, but definitely in 2024. And we're talking about adding $40 million to the $60 million that we've already completed at the beginning of the year.
Hamir Patel: Okay, great. Thanks, Antoine. And would that be largely on the manufacturer side?
Antoine Auclair: Yes.
Hamir Patel: Okay. And then, Richard, are you able to give an indication of how sales fared in the month of September?
Richard Lord: Yeah, in the month of September, as we already have discussed during our last meetings in Montreal, basically the month of September has been in the same trend that we've seen in the past. And we see the trend, for example, with the kitchen cabinet manufacturer to be a slight increase in this market. The commercial woodworking industry is doing well with an increase of 6%. And we have other specialized market, which is [anything else] (ph), an increase of 1%. And all the [other] (ph) market have a slight decrease of something like 2.5% to 3%. So, basically, we don't see any sign of recovery yet, but we're certain that in the coming months, the market will certainly improve. And Richelieu is now working with its team to make the budget for the next year. And many of our people are very positive about what will happen in the market. We just hope that these things will materialize. But there is no doubt in our mind the market will have to improve. The question is only when.
Hamir Patel: Okay, fair enough. And Richard, I know the margins kind of troughed in Q1. You had improvement in Q2 and Q3. How do we think about just given -- it sounds like near term, things are still a bit sluggish. Would you expect any margin improvement in Q4? And how do you think about maybe where full year margins could go in '25?
Antoine Auclair: Yeah. It's Antoine. Slight improvement. To change the margin materially, we would need to see a recovery in the market. So, we're in distribution. So, top-line additional sales goes down the bottom-line very quickly. Same thing if there's a reduction in sales. But in a market -- in a better market, you will see the margin improving. If not, there are a few things we're doing like improving our expansion projects and those projects we have ongoing. So, this will improve the EBITDA, but not materially if the margin -- if the market does not recover.
Hamir Patel: Okay. Fair enough. That's all I have for now. I'll get back in the queue. Thanks.
Operator: Thank you. Next question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Zachary Evershed: Good afternoon, everyone, and thanks for taking my questions. How consistently do you think you can add $100 million in run rate revenue through acquisitions? Do you think that's an average target or an annual minimum going forward?
Richard Lord: It is an average target. See, we have to -- the plan that we have, this is what we would like to achieve. If one year we make only $50 million, the next year, we're going to have to make $150 million, So, basically, average for the next five years should be around $100 million, which is quite possible. And we see the portfolio of potential acquisition that we have in our hands as we speak. We just said that we have a principle -- agreement in principle for four, but there are other coming soon as well. The timing seems to be pretty good.
Zachary Evershed: Good color. Thanks. And then, the U.S. customer lost in Q2, how is it going on backfilling those volumes?
Richard Lord: Well, we are getting some sales from other customers. Just to explain, that was lost, we had -- we were supplying them with hinges and slide with the Richelieu and Blum name, for example, have decided to have their own brand names importing from China. I don't think it's a good move for them, because the people when they replace their hinges or slide in the kitchen cabinet, it's only printed Blum or Richelieu onto the slide because we both together, I think, we have something like 80% of the market. So -- but that's the decision we have to respect that and we have to find sales with other customers, which we're doing with customers like Tractor Supply (NASDAQ:TSCO), for example, that we have a good commitment from them and we're going to see our sales increasing in the next quarter as well. Basically, we should get that business back from other customers and we have to sell more to the retail market in the U.S. We have to refine our plan. We have to -- we would like to make an acquisition in this market as well. Eventually that will happen.
Zachary Evershed: Understood. Thanks. And on the topic of Blum, you mentioned that they were pushing for a price hike last quarter. How well is that flowing through so far? And are you seeing other suppliers start to follow suit?
Richard Lord: No, we don't see that, but that's going to happen because the suppliers that are not from Asia, they have to increase their costs. The rents are increasing, the salary increasing. So basically, I think this is obvious that eventually that all these suppliers, the North American, the European suppliers, will have to increase their price again.
Zachary Evershed: Got it.
Richard Lord: And that does not apply to Asia though, because Asia, we thought we -- the communication that we have with our suppliers in Asia is that they don't have much to do, so they're quite willing -- they give us better price though. So that -- this is -- will improve the margin for the future, but they don't have much to do. So, we don't see them -- we don't see that they will increase their price shortly.
Zachary Evershed: Understood. Thanks. And just last one from me. When do you think we start to get out from under the modernization and expansion costs?
Antoine Auclair: I would say early next year, Zach.
Zachary Evershed: That's it for me. Thanks. I'll turn it over.
Richard Lord: Thank you.
Operator: [Operator Instructions] And at this time, Mr. Lord, we have no other questions registered. Please proceed.
Richard Lord: Okay, thanks everyone. Now, we would be happy to answer your question. Hello?
Operator: Hello, Mr. Lord?
Richard Lord: Yes.
Operator: We have no other questions at this time, sir.
Antoine Auclair: Sorry. No, that's fine, and thanks a lot for attending. And if you have any questions, you can give us a call.
Richard Lord: I also apologize. I received a phone call. So, I had to answer immediately. So, it took 10 seconds, but that timing was not good for you. So, I apologize.
Operator: Thank you, gentlemen.
Richard Lord: Thank you. Bye.
Operator: Ladies and gentlemen, this does 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.
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