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Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Second Quarter 2019 Results Conference Call. [Operator Instructions] Note that this call is being recorded on Thursday, July 4, 2019. [Foreign Language]
Merci, thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the second quarter ended May 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 very well in the second quarter as shown by increase in sales, EBITDA, net earnings and cash flows compared to the same period of last year. Our market development, acquisitions and innovation strategies fueled sales growth to U.S. manufacturers and retailers. It should also be noted that the significant rise in our sales to U.S. retailers is partly due to the increase in cyclical sales during the period, which were lower in the first quarter of the year. In Canada, sales growth resulted entirely from our manufacturers' market with sales to retailers that continue to be affected by a general slowdown in this market. We pursued our acquisition strategy by closing Euro Architectural Components on May 1, which is our fourth acquisition this year. This distributor based in Toronto and Montréal is a leading -- is a leader in the architectural hardware and stainless steel components for the market of the stairs, banisters and railings, preferably for glass, which is the trending market for both residential and commercial projects. Therefore, we're adding specialized product to our offering, new expertise and customers. Together with prior 3 acquisitions completed in the first quarter, Richelieu's sales will increase by approximately $30 million annually. By integrating these 4 successful acquisitions, we will focus on sales and operational synergies. Our investment totaled $18.4 million in the second quarter, including $16 million in business acquisition. We repurchased common share in the normal course of business for $4.5 million, which ended the period with a healthy and solid financial position. Now let's look at financial highlights. Second quarter sales reached $281.2 million, up by 6.8% of which 3.2% from internal growth and 3.6% from acquisitions. Sales to manufacturers stood at $38 million, up by 7.1%, 2.9% from acquisition (sic) [ internal growth ] and 4.2% from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of $43.1 million, up 5.4%. In Canada, sales amounted to $183 million, up by 1.3% entirely from acquisition growth. Our sales to manufacturers reached $151.9 million, up by 2.6%. As for the hardware retailers and renovation superstores market, sales stood at $31.1 million, down 4.9%. Inventory realignment of our retail customers -- retail market -- retail customer market due to a general slowdown in this market continues to have a downward impact in our sales. It should be noted that Richelieu did not lose any market share in this market.In the U.S., sales totaled USD 73.3 million, an increase of 14%. Sales to manufacturers reached USD 64 million, an increase of 11.2% over the second quarter of 2018, of which 5.1% resulted from internal growth and 6% from acquisitions. Sales in U.S. dollar to hardware retailers and renovation superstores were up 39%, mainly attributable to lower cyclical sales in the first quarter of this year. Total sales in the U.S. reached CAD 98.2 million, an increase of 18.9% and represented 35% of our total sales. For the first half of 2019, sales totaled $507.4 million, up 4.6%, 1.4% from internal growth and 3.2% from acquisitions. Sales to manufacturers reached $430.5 million, up 6.2%, 2.3% from internal growth and 3.9% from acquisitions. Sales to hardware retailers and renovation superstores were down 3.9%. In Canada, sales reached $326.7 million, up by $1.9 million of which -- or 0.6% of which 1.7% resulted from acquisitions and an internal decrease of 1.1%. Sales to manufacturers rose to $269.6 million, up by $8.4 million or 3.2% of which 1.1% resulted from internal growth and 2.1% from acquisitions. Sales to hardware retailers and renovation superstores reached $57.1 million compared to $63.6 million, down 10.2% over the first half of 2018. In this market, the first quarter of 2018 was marked by exceptionally high sales. In addition, during the first semester of 2019, our sales were impacted by inventory realignment of our hardware retailers customers due to a general slowdown in this market. It should be noted that Richelieu did not lose any market share in this market. In the U.S., sales amounted to USD 135.3 million, up by 7.2%, 1.2% from internal growth and 6% from acquisition. It reached CAD 180.7 million, up by 12.7% accounting for 35.6% of our total sales. Sales to manufacturers totaled USD 120.5 million, an increase of $7.2 million or 6.4% over the first half of 2018, of which 6.7% resulted from acquisition and an internal decrease of 0.3% following the termination of a supply agreement with our major customers as reported in the previous quarters. Note that at comparable sales level, internal growth in the U.S. manufacturers market would have been 3.8%. Sales to hardware retailers and renovation superstores were up 14.7% from the corresponding period of 2018. Second quarter EBITDA reached $30.7 million, up by $2.7 million or 9.5% over the second quarter of 2018. Gross margin and EBITDA margin improved slightly from the second quarter of 2018. The EBITDA margin stood at 10.9% compared to 10.7% last year.First half EBITDA was $48.2 million, up 0.6%, the gross margin remained stable. As for the EBITDA margin, it stood at 9.5% compared to 9.9% for the first 6 months of 2018. The EBITDA was impacted by the slowdown in the hardware retailer market in Canada and market development costs incurred in order to increase our product offering and our presence in the retailer market in the U.S. Second quarter net earnings attributable to shareholders totaled $19.3 million, up 6.1%. Net earnings per share were $0.34 basic and diluted, an increase of 9.7%. First half net earnings attributable to shareholders reached $29.4 million, down 4.9%. Net earnings per share was $0.51 diluted, down 3.8%. Second quarter cash flows from operating activities before net change in working capital balances amounted to $23.7 million or $0.41 per share, an increase of 6.7%. For the first half, they were down 1.6% totaling $37.6 million or $0.65 per share. For the second quarter of 2019, dividends paid to shareholders amounted to $3.6 million, an increase of 4.2%. We repurchased common shares for $4.5 million. During the first 6 months, we paid dividends of $7.2 million, up by 4.3%. We also invested $25 million of which $20.8 million for business acquisition and $4.3 million primarily for equipment to improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of $342.1 million and a current ratio of 4:1. Turning to our outlook, in the next quarters, we will remain focused on market share gain in Canada and in the U.S., new synergies, operational efficiency and profitability and new acquisition opportunity compatible with our growth objective. We are confident that our strategy of ongoing innovation, market development and acquisition will continue to bring good results in the second half of 2018. That concludes my overview. Thank you for your interest. We'll now be happy to answer your questions.
[Operator Instructions] And your first question will be from Zachary Evershed at National Bank Financial.
What can you tell us about the quality of the new acquisition and your forays into stairs, banisters and railings?
Yes. Actually, I would say that the first 3 acquisitions that we've made were in the door and window industry for the manufacturer of that type of industry that was some -- that type of products we were selling to a very, very small extent. Now by making those acquisitions, we grabbed market share in Canada and those products we believe are totally compatible with Richelieu, so you can understand and do and grow in the future. Regarding the Euro Architectural, this is a very interesting company, selling stair components, including stainless steel stair components, which is a very trendy market. Combined with glass, we see that new -- those new system of stairs in every commercial -- in many commercial and many residential projects as well. So we think it's a market which is emerging that will be there for a long time because it's a high-quality, good look products and it brings good margin at the same time because there are not many distributors that could afford to be in that industry, that requires some large investment in term of inventory. So we're very happy with those new acquisitions that we've been working on for many months before we can conclude them.
That's good color. And as you're adding more distribution centers in territories that are already covered, do you have any plans to rationalize or close any in the coming quarters?
Yes. In Western Canada, we already started to make some rationalization. In Ontario and Québec, we don't think we're going to make any move in the short term because the occupiers -- we don't have the space to accommodate them for the time being, but midterm, that's something that we're going to look at. For the first months and the first year, the purpose is really to make sure that we achieve the results that we are expecting from those acquisitions.
Excellent. So moving on to the inventory question. Last quarter, it was a little heavy due to softer retailer sales. Are you able to quantify the impact that rebalancing your inventory had on Q2 results?
I will let Antoine answer to that, but in spite of the fact that the retailers are not buying much, we had a very good decrease of the inventory in the last quarter. Antoine?
Yes. If you exclude the FX impact and also the impact of the new acquisition, our inventory reduced by slightly more than $10 million during the quarter, but we're still carrying more inventory due to the sell pressure on the retailer side, but we've seen an improvement on the inventory side during the quarter.
And given that they're not buying much and you're still seeing the pressure there, how do you view your -- how do you view the likelihood of a recovery in that section? Do you have any information on end markets there?
You know, Zachary, I have been in that business for 30 years. I have been there. I know -- I've been working at Rona. So I understand, I think, this market quite well. What we are seeing today, I think I've never seen in 30 years. There is a real slowdown in this market. I think the -- I think what we've missed in the first 2 quarters will not come back because people now are doing the shared gardening, I don't think they're going to go back in the stores to buy the product that they forget to buy in the spring, but normally the market should be back to normal somewhere somehow before the end of the year, but actually, I don't have enough information to tell you when that could happen and we really feel that the market is in the severe slowdown. And it seems that the construction as well in Canada, in the U.S. is not a booming industry for the time being, but we -- usually Richelieu will always capitalize on the renovation market and we believe that this market should be -- should sustain our sales, but for the retailers, there is not much we can tell more than what we tell you that it seems that these guys actually, they don't sell much.
So then would it be fair to assume that Canadian retailer sales will continue to decline year-over-year for the rest of 2019?
Hopefully, things will get better in the fourth quarter. Hopefully.
Did you say fourth quarter?
Yes, because we are in the third quarter actually, and we don't feel that any comeback in that type of business.
That is good color. So as the Canadian market continues to soften and the U.S. portion of the business grows, would it be fair to assume that you'll see margin pressure in the back half of the year then?
No. We have a tight control on margin. And I think we control our expenses. We have very tight control on our expenses. I think we have to -- we have established new control on our freight expenses because we all know that freight is becoming an important factor in distribution because it does affect the margin directly. At Richelieu, in spite of that, I think we have slightly increased our gross margin in the second quarter, and we -- I think we should be able to maintain that in the next 2 quarters in spite of the state of the market.
And looking out to 2020 and beyond, do you see margin erosion as you expand the U.S. offering or further stability?
I think stability.
Perfect. And just to close out for me. Could I get some additional color on the geographic performance in Canada in the East, West and Ontario?
Yes. Actually, we see -- the East, we still have an increase below 1% in the Eastern Canada, but I think Antoine has something like 5% to 6% increase in Québec. Québec is still strong. The Maritime and the Atlantic areas are very, very -- are down, but Québec is still very good in terms of sales, and our customers are very busy in Québec. Ontario was down for the second quarter by 1.7%, while Western Canada was down by only 0.9%, which is in the circumstances, I think we're doing very, very well. I don't think if it is sustainable in the future, but this is what we have -- we're proud about our achievement in the second quarter.So that gives you a good figure of the geographic market in Canada. By market segment, actually we see kitchen cabinet manufacturer being down by something like 2.5%, like the millwork and commercial renovation being down by 3%, but we've got something interesting though. We realized that in other -- what we call other as a specialized market here, which is the result, that does not include acquisition. We're up by 6%. So that's the market development that we've done in the past due to the past acquisition as the new product line that we have introduced. So now we probably have to reclassify those topics to be more specific in the future, but actually we call that other as specialized market. We're talking about door and window manufacturers, glass, hardware customers, closet customers as well as retailers. So this is -- and we see an increase there of 6.2%, which is very good. In the residential furniture market, we're about flat, but the office furniture we have a nice increase of 7.8%, which is also the result of the strategy that we've talked to you about in the last 2 years creating a special team to sell to that type of customers, both in the residential and office. So now we see the result, so an increase of 7.8% in the office furniture market. So we're quite happy with that.
[Operator Instructions] And your next question will be from Rob Currie at Louisbourg Investments.
Just really wanted some color on some of our Canadian manufacturers. We're seeing that steady decline or deceleration continue. Are we going to see that rebound in Q3, Q4, or is that likely going to stay around 0, possibly turn negative?
I don't think Alberta will be better. I think it could be worse in Alberta. We see B.C. is still very good, should sustain as well as Québec. So Eastern Canada should continue to be stable. The information that we have from our sales force is that in Eastern Canada, our customers are very busy from here to the end of the year. And we see Ontario as being maybe close to being flat with a slight increase. What we think here will happen is a slight increase in Ontario for the last 2 quarters, but that has to be proven yet, but we talked to our sales management people over there, and this is what we hear actually that the customers are getting more busy because we are quite related with the renovation market, and that market usually do well whatever the circumstances are.
That's a good color. And just again on margins, if I could, you guys are talking about stable margins. You talked a little bit in the past about continuing to improve margins substantially now that some of the heavy lifting and some of the investments you guys are making are over. Last quarter, we talked about warehousing the inventory in third-party warehouses. Can you give us some color on how margin development in the back half of the year could progress as well?
I think, well, margins are -- the gross margin level, I think that's going to be stable. And regarding what we call the net gross margin, I think we have to have a tight control. We do have now a tight control. We had a control before, but we have a more tight control on those -- on that type of expenses because the cost of the freight keeps increasing because we use independent carriers to do our business. And actually, we have a good control on that and we -- usually we could -- I think we will control our gross margin. At the gross margin level -- net gross margin level, we're going to be on line with what we've seen so far. This EBITDA level depends on the sales as a matter of fact, but again, we have a tight control on our expenses. We will keep an eye on our hiring of people and what else, Antoine? Everything that is -- anything that is an expense, we make sure that we will pay attention to that. And I think we have a pretty good control. And if the sales are maintained, the margins should be stable.
Got it. That's great. The last question I had before I turn it over. Just on the acquisition front. You guys see -- can you give us any color on, if there is quite a bit more in the pipeline? And you guys have talked about before, I think you said something like, if the acquisition was right, maybe 2.5 to 3x EBITDA, you want to deliver up to -- are you seeing anything upsize, maybe not to that size, but to size at all that could be catching your eye that is worth kind of mentioning?
No, the pipeline is in good shape either in Canada or in the U.S. There is nothing outstanding out there requiring to leverage the balance sheet by 2 to 3x, but -- really, we have nice file open at the moment. We're looking at good opportunities and it's still healthy in both Canada and the U.S.
And you're talking about this Specialized Items segment. Is that going to be a continued focus for you guys, building out that?
We're always -- our purpose is not to sell nails at Richelieu, even though we have nothing against selling nails if it's profitable for us. But our purpose is to sell specialty products. We stop where the hardware stores stop. So we're going to continue, this is why we have added the door and window hardware product line in the course of the last couple of years as well as glass hardware as well as finishing products, product for the closets and the many other products. And we see as a result of that, that we -- our sales might be flat in other market segment, but in those 2 segments, like Office Furniture and specialty -- specialized market, we had a nice increase of 6% and 7%. So this is very positive. I think when we told you at the end of the year that we see that we have excess of inventory also because of the new product that we are introducing, now we see the results, we see the increased sales due to those decisions to add some product line to our product offering, and we will remain -- always remain on the specialty products, product that we have to sell to professionals with workers, that type of customer.
Yes, that's useful. Just one last question actually circling back to the margin. When you say stable, are you referring to stable in regards to these levels that we're seeing this quarter or stable year-over-year comparable?
What you've seen this quarter is representative of what will be sustainable, our point of view.
[Operator Instructions] And at this time, Mr. Lord, we have no other questions. So I would like to turn the call back over to you, sir.
There is no more questions. We thank you again for attending this call. It's always a pleasure to talk to you. If you need other information, do not hesitate to call us or visit us. Bye-bye.
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. Enjoy the rest of your day.