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Good afternoon, ladies and gentlemen, and welcome to the Richelieu Hardware Third Quarter Results Conference Call. [Operator Instructions] Note, the call is recorded on Thursday, October 4.[Foreign Language]
[Foreign Language]Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter ended August 31, 2018. With me is Antoine Auclair, CFO. As usual, note that some of today's issue include forward-looking information, which is provided with the usual disclaimer, as reported in our financial filings.During the third quarter, we continue to increase our sales and improve our EBITDA margin. We ended the period with a healthy and solid financial position. We remain on the lookout for acquisition opportunities. And on September 4, we completed the acquisition of Chair City Supply, a U.S. distributor, which is our second U.S. acquisition this year. Chair City distributes specialty products to furniture manufacturers from its 4 distribution centers: 3 in North Carolina and 1 in Tennessee. Our network now includes 36 centers in the U.S. and 36 in Canada. This acquisition strengthens our presence, our team, our product offering and our customer base in this significant market segment while adding $15 million in sales on a yearly basis.In the first 9 months, we repurchased common share totaling $14.1 million, including $8.9 million in the third quarter.Let's look at financial highlights. Third quarter sales reached $260.6 million, up by 2.9%, of which 2.2% from internal growth and 0.7% from acquisition. Sales to manufacturers stood at $221.9 million, up by 4.4%, 3.5% from internal growth and 0.9% from acquisition.In the hardware retailers and renovation superstores market, we achieved sales of $38.7 million, down by 4.9%. In the same period of 2017, Richelieu had benefited from significant sales resulting from the initial introduction of new products in stores and higher cyclical sales, both in Canada and the U.S.In Canada, sales amounted to $178.7 million, up by 3.8% entirely from internal growth. Our sales to manufacturers reached $143.7 million, up by 5.4%. As for the hardware retailers and renovation superstores market, sales stood at $35 million, down 2.5%. In the U.S., sales totaled USD 62.4 million. Sales to manufacturers reached USD 60 million, up by 0.3%, of which 2.4% from acquisitions and due to the termination of a supply agreement with the major customers, a decrease of 2.1% of internal growth. With comparable sales, internal growth in the manufacturers' market would have been 6.6%. Sales in U.S. to hardware retailers and renovation superstores were down by 21.6% from the corresponding quarter of 2017 due to higher cyclical sales in the third quarter of last year, keeping in mind that year-to-date sales increased by 70%. Total sales in the U.S. reached CAD 81.8 million, an increase of 1% and represented 31.4% of the total sales. Of the first [Audio Gap] sales totaled $745.9 million, up by 7.7%, 3.9% from internal growth and 3.8% from acquisitions. At comparable exchange rates to the first 9 months of 2017, sales growth would have been 8.6%. Sales to manufacturers reached $627.3 million, up by 7.2%, 2.7% from internal growth and 4.5% from acquisitions. Sales to hardware retailers and renovation superstores grew by 10.8% or $11.6 million to total $100.6 million, mainly due to our market development efforts that resulted in significant sales increase in the first and second quarters of 2018 compared to the same period of last year.In Canada, sales reached $503.7 million, up by $41.5 million or 9%, of which 5% from internal growth and 3.9% from acquisitions. Our sales to manufacturers amounted to $405 million, up by 10.3%, of which 5.4% from internal growth and 4.9% from acquisitions. Sales to hardware retailers and renovation superstores market grew by 3.8%.In the U.S., sales amounted to USD 188.6 million, up by 8%, 4.2% from internal growth and 3.8% from acquisitions. They reached CAD 242.2 million, up by 5.2%, accounting for 32.5% of total sales. Sales to manufacturers reached USD 172.9 million, an increase of 4.5%, of which 0.6% from internal growth and 3.9% from acquisitions. With comparable sales, internal growth in the manufacturers' market would have been 6.9%. Sales in the hardware, retailers and renovation superstores market were up by 70.7% in US dollars. Third quarter EBITDA reached $28.9 million, up by $1 million or 3.6% over the third quarter of 2017. Gross margin and EBITDA margin improved slightly from the third quarter of 2017. The EBITDA margin stood at 11.1% compared to 11% last year. Of the first 9 months, EBITDA was $76.8 million, up $3.9 million or 5.3%. And EBITDA margin stood at 10.3% compared to 10.5% for the same period last year.Third quarter net earnings attributable to shareholders totaled $18.4 million, up by 1.4%. Net earning per share were $0.32 basic and diluted, an increase of 3.2%. Amortization expenses for the first 9 months of 2018 amounted to $9.8 million compared with $8.5 million for the same period of 2017, up by $1.3 million, resulting mainly from the increase in capital assets acquired last year.For the first 9 months, net earnings attributable to shareholders reached $49.3 million, up by 3.2%. Net earnings per share was $0.84 diluted, up by 3.7%. Third quarter cash flow from operating activities before net change in working capital balances amounted to $22.6 million or $0.39 per share, an increase of 3.2%. For the first 9 months, they were up 5.9%, totaling $61.1 million or $1.05 per share.For the third quarter of 2018, dividends paid to shareholders amounted to $3.5 million, up by $0.2 million over the corresponding quarter of 2017. During the first 9 months, we paid dividends of $10.4 million, up by 5.2% and repurchased common shares for $14.1 million. We also invested $10.2 million, of which $2 million for business acquisition and $8.1 million primarily for the purchase of equipment to improve operational efficiency.As at August 31, 2018, net cash totaled $7.4 million, and our working capital was $328.9 million for our current ratio of 5:1.Turning to our outlook. In the fourth quarter, we will remain focused on product innovation, market penetration and development strategies on the integration of further synergies with our latest acquisitions. We will continue to identify acquisition targets in North America, which are fully compatible with our growth objectives. We are confident we will achieve good results for the year ended November 30.That concludes my overview. Thank you for your interest. We'll now be happy to answer your question.
[Operator Instructions] And your first question will be from Zachary Evershed at National Bank Financial.
Zach here for Leon. I'll kick it off, the question about the termination of the supply agreement with the major manufacturing customer. In Q2 last quarter, we calculated the impact at about $5 million, and now we're seeing about the same this quarter. Is that $5 million figure correct?
Yes, it is.
Perfect. And so will we see a similar drag in Q4 and Q1? Or is there a seasonality component to it?
Same thing in Q4 and Q1. After that, we'll be free from that.
Perfect. Second question for you is on the drop in the retailers' revenue. I understand that Q3 '17 was a tough comp as it was up about 20% on new product introductions and higher cyclical sales. Can you give us a little bit of color on those new products?
Our new products is well introduced in stores. For example, we have additional business we closed in Canada and some other customer as well, so it's been a big move in the course of last year because we were loading those stores. It created sales that are now at the cruising level. Instead of loading now, we're just cruising with the normal speed, which is normal when you deal with that such customers. And that -- in that type of basis, it's just perfectly normal to see what we are seeing now. That doesn't mean -- that doesn't -- we don't lose any business. We continue to gain business. But the main impact is the loading of the stores last year plus the cyclical sales with the cyclical customers that typically by -- only by cycle, you can have all those with one quarter, like a type of Costco and that type of business. For a quarter, you have 0 business. The next quarter, you have millions of dollars business. So we have to live with that. But at the end of the year, you're going to see that things are going to be very positive.
That's very helpful. And so you said at the end of the year, things are going to be very positive. We do see the Q4 '17 looks like a fairly easy comp, so you're expecting big things for Q4.
Maybe not big thing, but it should be okay.
Wonderful. So you mentioned that you've reached a cruising speed. Would you say that it's right to think about sales to retailers as about a $40 million a quarter business, roughly?
What you're saying makes sense, but our goal here and our job is to continue to improve and to increase our market share in that market, so we have many, many projects on the table that could bring further business that we should hear in the future. But for the time being, yes, your $40 million makes sense.
Excellent. Would you be able to give us a geographic breakdown of your revenues? Were there pockets of weakness in Canada, for example?
Yes, yes, exactly. Actually, for the manufacturers market, Eastern Canada, our sales in the last quarter increased without acquisition by 4.4% for the Eastern Canada, which is Québec and The Maritimes and Atlantic area. Ontario was up by 2.9%. Western Canada was up by 8.4% for a total of 5.5% for the Canadian market regarding the manufacturers. So it's quite positive. And we see various market like the kitchen cabinet manufacturers market, still increasing by almost 6%; commercial innovation with the residential woodworkers by over 6% as well; and residential furniture is up still by 3.2% in Canada and office furniture by over 5%. So basically, most of the market, we feel that is still very healthy. There is lot of activity still.
Beautiful. You don't see any of your end markets slowing down?
No, no. The end markets slowing down, no.
Wonderful. And then last one for you. Even though revenue growth wasn't as strong as what we were expecting, your margins did come in above our estimates, which is a great sign. Are the initiatives and new technology implementation costs done at this point?
It's almost done, as we said in previous phone calls and as with the last quarters. We basically said that in the fourth quarter, we should see some of the benefits, but we have started to see some during the present quarters, mainly in the last month for us because we are almost -- well, not almost. We're finished with the improvement that we are making in the U.S. in certain warehouses. And in Canada, the main project was in Montréal. So we are almost finished with installing the racking, which will replay the space that was available since we have this installed in auto stores. So basically, in the fourth quarter, everything should be up and running smoothly and should bring some benefits.
[Operator Instructions] [Foreign Language] And your next question is from Scott Carscallen at Mackenzie Investments.
I just want to ask a question about the tariffs, in particular tariffs on Chinese imported goods. I think the last quarterly conference call, you said you were importing about 15% from China, and we've seen tariffs already implemented on some Chinese goods. But in the event that the U.S. at the end of the year decides to put tariffs on all Chinese goods and takes those tariffs to 25%, what does that mean for you guys? Are you able to pass that on immediately to customers?
Yes. It does mean that we have to pass it on to the customers. Basically, the way it should work is that we would add something on the invoice for the extra duty that we have to pay due to that new regulation. So there's no doubt that Richelieu is not going to pay for those new taxes. We will have to charge the customers. And we already have -- I have in front of me the letter of one of our competitors, which is usually dealing mainly with the retailers in the U.S. that exactly is saying that they will charge the cost of the duty to their customers as well as we will do as well at Richelieu.
So we'll possibly see, basically, inflation across your sector?
That will be different with the America. That does not apply to Canada. So as far as we are concerned, 3,500 products are going to be touched, and we will immediately soon as we -- charge the customers.
[Operator Instructions] And at this time, Mr. Lord, we have no other questions. I would like to turn the call back over to you, sir.
Thank you to all of you again. And please, it's always a pleasure for us to talk to you should you decide to give us a call. Have a great day. Bye-bye.
Thank you, sir. 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.