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Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware's Second Quarter Results Conference Call. [Operator Instructions] This call has been recorded on July 8, 2021. [Foreign Language]
[Foreign Language] Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the second quarter and 6-month period ended May 31, 2021. With me is Antoine Auclair, CFO.As usual, know that some of today's issue include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings.We are really pleased with our second quarter. Our results showed strong growth and our financial position remains sound and solid. For comparison, it should be noted that during the same period last year, our sales were negatively impacted by a general decline in business due to the pandemic, both in the U.S. and in Canada. All our market segments have done very well, whether it be the kitchen cabinet manufacturers, architectural woodwork and the residential and office solution.We are particularly proud of the solid growth in market where we recently made acquisitions and product innovation, such as door and window manufacturers, closet manufacturers and glaziers. Our hardware retailers market also showed strong growth during the quarter. Thanks to our outstanding website, our one-stop shop approach and our interconnected North American network that enables us to make product available to our customers in a timely manner and provide alternatives when needed.As a result, the sales increase combined with cost control has positively impacted our profit margins, where we posted an EBITDA margin of 16.4% during the quarter. With the strength of our business model, the quality of our team and the ability of our organization to carefully adjust to market conditions and be proactive, we were able to provide the best possible support to our customers in the actual circumstances.During the period, we also successfully pursued our acquisition strategy and seized good opportunities, meeting our criteria of complementarity, synergy potential and long-term value growth. We completed 3 acquisitions in the last 3 months, the latest on July 5.As mentioned in our previous release, on April 5, we acquired the shares of Task Tools, a distributor of power tool accessories and related products serving the hardware retailers market in Canada and in the U.S. We also signed 2 agreements in principle, one of which was completed with the acquisition of Uscan Industrial Fasteners Ltd. on June 1. Uscan is a leading importer and distributor of screws, bolts and industrial fasteners operating a distribution center in Montreal from which it supplies hardware retailers, mainly in Eastern Canada.On July 5, we acquired 75% of the shares of Inter-Co Inc., a distributor of Division 10 products for the construction industry in Canada and in the U.S., operating 2 centers in Ontario and 3 in the U.S., in Arizona, Ohio and Texas. Interesting to note that this acquisition will be combined to one of our divisions already operating in this sector of activity and covering Western Canada. In addition, we signed another agreement in principle for an acquisition in the U.S. Altogether, this transaction would add sales of $73 million on an annual basis. I will now go to Antoine for the financial review of the period.
Thanks, Richard. Second quarter sales reached $371.4 million, up 49.6%, of which 46.8% from internal growth and 2.8% from acquisitions. At comparable exchange rate to last year, sales increase would have been 56%. Those increases are the result of the strong demand in the renovation market compared to last year, where sales have been negatively impacted due to the slowdown in business resulting from the pandemic.In Canada, sales amounted to $248.1 million, up 59.8%, of which 56.7% from internal growth and 3.1% from acquisitions. Our sales to manufacturers reached $203.7 million, up 63.5% of which 61.7% from internal growth and 1.8% from acquisitions. As for the hardware retailers, sales stood at $44.4 million, up 45.1%, 37.4% from internal growth and 7.7% from acquisition.In the U.S., sales grew to USD 99.4 million, up 49.5%, 47% from internal growth and 2.5% from acquisitions. As in Canada, the renovation market in the United States has been growing strongly. Sales to manufacturers reached USD 87 million, up 52.6%, 50% from internal growth and 2.6% from acquisitions. In the hardware retailers and renovation superstores market, sales grew by 30.9%, mostly from internal growth. Total sales in the U.S. reached CAD 123.3 million, an increase of 32.6% and representing 33.2% of total sales.For the first half of 2021, sales totaled $669 million, up 34.4% of which 2.5% from acquisition and 31.9% from internal growth. In Canada, sales reached $441.3 million, up by $129.4 million or 41.5% of which, 39.5% from internal growth and 2% from acquisitions. Sales from manufacturers reached $357.3 million, up $104.8 million or 41.5% mostly from internal growth. Sales to hardware retailers and renovation superstores reached $84 million compared to $59.4 million, up 41.4%.In the U.S., sales amounted to USD 181.3 million, up 32.5%, of which 28.8% from internal growth and 3.7% from acquisitions. They reached CAD 227.7 million, up by 22.6% accounting for 34% of total sales. Sales to manufacturers totaled $156.1 million, an increase of $38.5 million or 32.7%, of which 28.5% from internal growth and 4.2% from acquisitions. Sales to hardware retailers and renovation superstores were up 31% compared to last year.Second quarter EBITDA reached $61 million, up $27.2 million or 80.5% over last year, resulting from significant increase in sales and continued control of expenses. Gross margin improved slightly, and the EBITDA margin stood at 16.4% compared to 13.6% last year. First half EBITDA reached $99.1 million, up 69%. As for the EBITDA margin, it stood at 14.8% compared to 11.8% last year.Second quarter net earnings attributable to shareholders totaled $37.4 million, up 111.4%. Net earnings per share were $0.67 basic and $0.66 diluted compared to $0.31 basic and diluted last year, an increase of 116.1% and 112.9%, respectively. First half net earnings attributable to shareholders reached $58.4 million, up 98.1%. Diluted net earnings per share stood at $1.03 compared to $0.52 last year, up 98.1%.Second quarter cash flow from operating activities before net change in working capital balances amounted to $46.5 million or $0.82 per share, an increase of 74% compared to last year, resulting primarily from the net earnings growth. For the first half, they were 63.2% totaling $76 million or $1.36 per share.For the second quarter of 2021, financing activities used cash flow of $6.7 million compared to $2.8 million last year. Dividends paid to shareholders of the corporation amounted to $3.9 million, while no dividend was paid in the corresponding quarter of 2020. First half financing activities used cash flow of $22.4 million compared to $10.6 million in 2020. Dividends paid to shareholders amounted to $11.6 million compared to $3.8 million last year. In the first quarter of 2021, a special dividend of $6.67 per share was paid in addition to a quarterly dividend of $0.07 per share. We also repurchased common share for an amount of $3.3 million in the first half of 2021, while no share repurchase in 2020.During the second quarter, we invested $13.9 million and $16.7 million in the first half, of which $9.8 million for business acquisitions and $6.9 million primarily for the purchase of equipment to maintain and improve operational efficiency, including the addition of IT licenses. We continue to benefit from a healthy and solid financial position, cash balance of $89.6 million, almost no debt, a working capital of $416.3 million for a current ratio of 3.7:1 and a return on average equity of 20.4%.I now turn it over to Richard.
Thank you, Antoine. In conclusion, our value-added service concept remains the cornerstone of our leadership. It's based on innovation and product offering, the most diversified and complete offering in our market, covering the widest range of specialty product categories.On sample and easy access to our products, [ what are true ], our network of one-stop centers one-stop shop centers and outstanding website, richelieu.com. On the quality and availability of our service and the broad range of unique sales tools in our market that we provide to our customers, our decision to maintain our venture level at the beginning of the pandemic showed to be the right decision, and our customers are still benefiting from it. We continue to do our utmost to support them.We expect our manufacturer market continuing to be strong. To this end, in anticipation of strong future growth in the U.S. and in order to meet demand and provide the best possible service, we have several expansion projects on the table for some of our U.S. centers, notably in Detroit, Atlanta, Dallas, Boston and Orlando. In addition, we will open a new center in Pennsylvania likely at the end of the third quarter of 2021.As for the sales of hardware retailers market, we do not expect growth in the second half given the exceptional sales in the last 2 quarters of 2020. However, compared to 2019, retailers market should be -- should show a very healthy growth and should continue to be strong in the coming quarters. We remain highly vigilant to market conditions and closely monitor prices and worldwide transportation cost increases. If necessary, selling prices will be adjusted accordingly.We are confident in the Richelieu strength and great potential to continue to grow in the coming periods and execute its strategy in order to create long-term value. Thanks, everyone. We'll now be happy to answer your questions.
[Operator Instructions] Your first question comes from Hamir Patel with CIBC.
Congratulations on a strong quarter. Richard, I wanted to follow up on a point you made about retailers. I think you said you didn't expect growth, but should still be up healthy versus 2019. Obviously, clearly, it will be year-over-year down, but any sort of order of magnitude on at least compared to the elevated 2020 levels we should expect for the retailer category in the back half of the year?
Yes. I think if you remember well, in the 2 last quarters, the sales of our retailers increased by something like -- correct me if I'm wrong, Antoine, something like 40%, 45%. So it could be very hard to surpass that. So we compare ourselves with 2019, which -- and we expect the growth to be in the high double-digit growth still in the last 2 quarters compared to 2019.
Okay. No, that's very helpful. And then, Richard, anything you could share on how June has fared for sales in the manufacturers category?
The manufacturers category is still very strong. It continue about at the same pace that you've seen in the last -- the second quarter. And then we expect that to continue on for at least for a few months because, actually, we see -- we think there is a lot of cash in the market. The consumers have been panning up cash both in U.S. and Canada in the last year. And also, many projects have been delayed because many people that had projects for renovations, like kitchen cabinet or closet, had to delay their projects because they cannot find a contractor to do the job. So it's postponing some work. And I guess, with the cash available in the market and the feeling that we've got from our customers because we are in constant discussion with our customers, we expect them to be very busy still for a few months.
Okay. And then, Richard, just coming back to the retailers market, other than, obviously, the tough year-over-year comps, we've seen signs of the DIY segment slowing in recent months. Have you seen something similar for your products? Or has there been maybe differences in terms of actual product impacts on DIY?
Yes. Compared to last year, we see it. We also see that some of the retailers, when we had enough stock, they have created maybe -- they have buy more inventory that really needed in order to secure their business there. So this is -- that would be -- it's also creating some delay in future ordering. And you're right, the consumers buy probably less now than it was -- certainly less now than they were buying last year. There's no doubt about that.
Your next question comes from Meaghen Annett with TD Securities.
So looking at the EBITDA margin, a really strong performance there in the quarter. Are there any onetime benefits that you would call out here? And as we think about the rest of this year and fiscal '22, just on an annual basis, can you maybe update your thoughts on where you see the EBITDA margin trending maybe relative to 2019?
No, Meaghen, there's no onetime in there, but definitely, the high volume is favorably impacting the EBITDA margin. Well, that's the main impact. We're being very rigorous in terms of cost control, but the strong sales volume is benefiting the EBITDA margin. That's for sure. And as for the rest of the year, so it should continue to be a high margin versus last year. So you should -- and looking at the future, if you look, if you're using the 2019 EBITDA margin, you should see improvement as well because the 2020 EBITDA margin was not necessarily recurrent, but if you use 2019 with improvement on it, you should be on target.
Okay. And just thinking about input costs and price increases, Richard, I think you touched on this a little bit. So I think we're in a fairly unique environment here where we've seen costs rise at a rapid pace, but then we're also seeing some relief now on the cost side. So how do you manage pricing with the customer in an environment like this? And do you see any reluctance to purchase from customers in an environment such as this?
Not at all. Our pricing, regarding the hardware product, I would say that since 2019, the price has increased by roughly close to 10%, which is far from being the increases that we've seen for the lumber, for example. So basically, the actual situation, we keep a close, a very close eye to the -- whatever is happening to the market for our products. So -- the way we manage our pricing is to protect our gross margin as a percentage. So if we have cost increases and freight increases that we expect to continue on forever, we change our pricing immediately. As far as the manufacturers accountant, it takes 24 hours to change our pricing except for maybe 20% of our customers that are on quotation. And for the retailers, usually, it takes between 60 days and 90 days, which is normal with that type of customer. So basically, you can be assured that our gross margin, as such, is very well protected.
Okay. And just last question. So in light of some of those global supply chain challenges, can you just talk about your approach to inventory management? Are you seeing any challenges there in sourcing key products? And then as we see some of that slowdown take place or maybe more of a normalization with the retailers, how do you plan for that from an inventory standpoint in terms of your purchases?
In the today's circumstances as we speak, we're getting our product into the North America when it comes from Europe and Asia, is a challenge. We have allocation for containers, for the extra containers because we have a lot of extra containers. We pay a higher price. Some of it we can transfer to selling prices, but some we don't. But whatever, we do not neglect any possibility to -- in order to have a better service for our customers. So we pay the high price if we have to bring the containers in, and we even pay air freight if necessary to maintain whatever is necessary. So basically, those extra expenses are largely compensated by increased sales, as you can see in our last quarter financials. And we expect that to continue on for a few months. And I'd say you -- with the -- actually, the small decrease -- the decrease that we see as we speak now with the hardware retailers, it will probably create an impact that in 2 months, 3 months from now, we might have a little bit more inventory that would be needed, but we don't see that as a problem. For the manufacturers though, we expect the growth that you see now to continue on for maybe not forever, but for many months.
We have a following question from Zachary Evershed with National Bank.
Congrats on the quarter. So you've got a great pace of M&A set up thus far in 2021. Can you tell me a little bit about the pipeline? And if you think you can keep up that pace?
I will let Antoine complete my comments, but we're very proud with the acquisition we've made so far. As we already discussed in the previous months, we see that more people are willing to sell their business for whatever reason. I think the pandemic is just another storm in their lives, I think maybe they had enough storm in their life with all the downturn businesses that we had before. And some will sell also because they have a good year. So since they make a profit this year, they said about, okay, now it's time to sell the business. So because of that, we even do with the multiple would be basically the same. So we're going to pay a higher price because they have -- they do more profit this year. But that's not a problem for us because it does not represent material differences in the price that we would have paid without the pandemic. Antoine, what would you add to that?
No, you're right. The pipeline is very healthy in Canada and the U.S. on the retailers market and the manufacturers market as well. So we're very busy. We're working on nice opportunities as we speak. So you should be hearing from us in the next few months.
And we have other opportunities coming.
Great news. And you've really got cash burning a hole in your pocket at this point. Any plans for a substantial dividend hike or more significant activity on the NCIB?
It's a very good question. We ask ourselves the same question. We don't know. We never did something like that, and we -- it's not the first time that we are in a cash position like what we see now. Depending -- our priority will remain the acquisition and, Antoine, what would you add to that?
Yes. Definitely, acquisition is the priority. We have a share buyback program in place as well. So there are a few options to use this cash.
Great color. And then in terms of the expansion in the U.S., what kind of expenditure do you expect over what time line?
Actually, the expansion that we're doing, Detroit is in process now. It should be completed at the end of August. When I mean completed, if we don't encounter any procurement problems or whatever, the racking that we needed, that type of thing, we never know what's going to happen in these days. So Detroit, it would be --- we're going to go from 50,000 square feet to 140,000 square feet. We used to be only 50,000, but we had to pay for exterior warehouses that we'll have the possibility to eliminate now. Atlanta is going to go from 50,000 to 150,000. Our management team over there have -- with all the projects that we have, have justified to us a good business plan that will largely compensate and increase sales, the investment that will be required to entail ourselves in that warehouse. And actually, we have -- we're opening a new warehouse. Also, we were opening -- we'll be opening a new warehouse in Pennsylvania. So that's -- we actually -- we service the Pennsylvania market from our New Jersey warehouse. Our New Jersey warehouse, actually, is back to the roof. It's overcapacity. So that will give a relief to New Jersey and give us the opportunity to expand our sales in Pennsylvania. And the other projects are and -- Texas is already done. We went from -- I don't remember what happened from 40,000 to 50,000 -- 80,000 square feet of...
No. Dallas we went from 45,000 to 70,000 square feet.
Okay. So basically, all this project, we're working on now and should be completed -- many of them will be completed before the end of the year.
That's great. And then just one last one for me. We've already talked quite a bit about margins on the call. But could you help us break out how much is really torque on the higher top line? And how much is a reduction in your overall central cost structure? And there's also some gross margin left in there. Is that correct?
Yes, a slight increase on the growth. Basically, the EBITDA margin on a normal volume would be somewhere between 12.5% and 13%.
Your next question comes from Robert Currie with Louisbourg Investment.
Guys, great quarter. Just wanted to ask a few questions on some mix changes that may have happened over the past a little bit, just to kind of recalibrate if you don't mind. So when we look at renovation versus new builds, you guys have usually been 3 quarters renovation, a quarter new builders, something like that. Has that changed at all? Or are we kind of seeing the similar over the past several months since ramp up?
That has not changed. Both the sales to our ororder are really related to innovation as well as the kitchen cabinets and the closet manufacturer. But we see, actually, more sales to the new construction. It doesn't change the percentage as such, but we see more and more higher-end houses and condominium being built. And those -- I was reading lately that some statistics saying that on the new construction, the cost for the kitchen cabinet is something like 4%. So if you buy a new house for $1 million, which is quite a high-end house, so the kitchen cabinet will be worth $40,000 minimum, while in a new construction for a house that sells for $200,000, both the bathroom and the kitchen cabinet will account for only 4%. So it's $12,000. So in the $12,000 kitchen cabinet and vanity in your bathroom -- and so you cannot -- at this price, you don't even have anything in new closet except whatever is needed to hang your clothes. So basically, it's only $12,000 for that. It's really minimal. So that does not require many Richelieu products to achieve such a project. But usually, in a new house, even though it's a house that is worth $200,000 or $250,000, people will do renovation 5 years after they bought a new house. So that brings some market for the future for us as well and our customers.
All right. That's helpful. Then just thinking about your mix, you guys have talked before in the past about how some of your U.S. business is a little more commoditized when you compare it to your Canadian business in terms of the actual products being sold. You guys have mentioned the goal being to try to change that, the attitude in the U.S., to want more premium products. Has that been also playing a part here?
Moving forward, actually. Our product mix in the U.S. continue to improve. And it's -- actually, we know that the EBITDA margin in the U.S. is not very far from the one that we have in Canada. And so, basically, our exclusive product, as we already said, that 60% of the product that we sell are either exclusive or Richelieu brand name products. And we see all those products, actually, being very attractive for the U.S. market. Richelieu is becoming more and more well known. And also, I think the COVID situation also maybe was a springboard for Richelieu to attract new customers, new calls from people that were not contacting us before. So basically, I think the investment that we're going to make in the U.S. are going to open the growth for -- a more important growth in the future than we've seen in the past.
Yes. That's actually a good segue into the next question on -- when you think about the U.S. or even Canada as well, but looking at market share versus just torque in general, how would you guys break down your growth in the past few very strong quarters in terms of actually winning market share versus general market growth? Obviously, you don't need to give specific numbers, but just kind of general ideas.
I would say it's 80% market growth and 20% new market penetration.
Last question I have for you here is just on -- I want to paint a scenario for you. I'm curious if you can kind of give me some guidance. If I -- I just want to think about the operating leverage within your business, just given the gross margin. If you kind of -- if you were able to double your business over the next 5 years in terms of top line, similar gross margin profile, so the products are very similar to the mix you have right now. But where do you think your actual EBITDA margin could go from here? Is it you kind of top out at close to 20%? Or if you even tripled your business from here, could you actually see your margin getting up higher to that like 30% margin? Or do you think that being below 20% is kind of -- that's really where you're -- because it's a capital-light business, it's kind of where you're probably going to max out at? Just curious if you could provide any kind of clarity on where the potential margin profile of the business really is. Just seemed like, this quarter, seems such a big jump in margin. I'm just trying to understand how much of that is really available as you guys continue to grow over the next 5 to 10 years?
If we continue to grow, there's no doubt that our EBITDA margin will continue to grow as well. Will that reach 20%, that will be a dream. It's like if you were being -- following up on us since a few years, I keep seeing the investors in my dreams to reach a 20% return on, what do you call that, Antoine, that you announced a few minutes ago.
Yes, the average -- the return on average equity.
Average equity. So basically, I think it's an amazing number. And I think the EBITDA margin, I think if we dream of increasing our sales, depending on the type of investment and added expenses that would be needed to achieve it, I think, yes, the EBITDA margin should be -- could be close to 15%. I don't know. It's hard to tell that because let's say if we don't do anything, we just increased our sales, not making any further investment saying as we are now, we will certainly reach 20%, yes, no doubt. But to get that $1 million additional sales will certainly require extra expenses and acquisition with lower EBITDA margin that will dilute the actual EBITDA margin that we're achieving, that type of thing. But we're all dreaming that, dreaming altogether, is to increase that EBITDA margin. Yes, no doubt.
Yes. I mean, obviously, you guys have been around for a while, and you guys have an excellent track record, but you're still relatively small. So I'm just -- I'm kind of assuming that there's still quite a runway left for acquisitions and internal growth just in general. So I'm just trying to size up what the -- a lot of companies, it just seems like they can have margin expansion forever, but at one point, it's got to stop. And I'm just wondering where that stop is for you guys and what your real level of -- where it could really go from here. So it sounds like you're saying, 20% is high. And so -- but you can see it, you guys, get to more 15% realistically over the next little bit, if you kind of continue to grow in the direction you have been. Is that the way I should interpret it?
Does that make sense, Antoine?
Yes. If you look historically, the IS that we've reached historically is 14.5%. So we were in that area at some point.
Was that pre-IFRS 16? Or is that including...
Yes, pre-IFRS 16.
Yes. And that would have been before expanding heavily in the U.S., and then doing all the -- I know you guys have done a lot of -- I don't know how you want to call it, but expansions of your warehouses that have created some headwinds on margin.
You're exactly right. So that's prior to the accelerated growth in the U.S. But now, as you can see, the EBITDA margin is improving year after year. So it all depends on the kind of investment we're making with the acquisition, for example. But same-store sales, the EBITDA margin is always increasing.
[Operator Instructions] It appears there are no more questions at this time. Mr. Lord, you may proceed.
Thank you to all of you. There's no more questions. So we'll always be happy to meet you, to talk to you over the phone if you need or if you have more questions. So thank you very much, and have a very nice day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.