Richelieu Hardware Ltd
TSX:RCH
Earnings Call Analysis
Q3-2023 Analysis
Richelieu Hardware Ltd
Richelieu Hardware's third quarter performance showcased the effectiveness of their strategic initiatives, achieving sales slightly lower than the extraordinary pandemic-fueled third quarter of 2022. The company's sales for the first nine months tallied at $1.3 billion, consistent with the prior year, highlighting the resilience of their customer-centric business model and their diversified markets across North America. Business acquisitions partly compensated for a decline in internal sales compared to the previous year.
While third quarter sales dipped by 2.9%, the company still managed to rake in $192.8 million, closely contending with a robust prior year marked by a 16% internal growth. A small decline was noted across various segments, with U.S. sales experiencing a 5.6% decrease and Canadian sales a 3.4% decrease, adjusted for internal decreases and contributions from acquisitions. EBITDA for the quarter dropped by 23% to $61 million with a margin of 13.3%, a decline from the previous year's 16.7%. Net earnings attributed to shareholders fell by 34.6%, reflecting the various costs associated with expansions and acquisitions, particularly in the U.S. However, the company saw a strong cash flow from operating activities, achieving a $103.5 million inflow in contrast to a $2.7 million outflow in the same quarter last year. Richelieu continued to strengthen its financial posture, reporting an average return on equity of 15.5%.
Throughout the expansion and integration stages, Richelieu has finalized notable projects in key regions. With the consolidations in the Atlanta and Nashville regions completed and new expansions like the Seattle center becoming fully operational, the company is set up for greater efficiency and market reach. Despite the overall market context, Richelieu's proactive strategic investments, particularly in the U.S., and the ongoing integration of acquisitions demonstrate their commitment to growth and sustained performance as the fiscal year ends on November 30, 2023.
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Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware third quarter results conference call. [Operator Instructions] This call is being recorded on October 5, 2023. [Foreign Language]
Mercy, thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter and first 9-month period ended August 31, 2023. With me is Antoine Auclair, CFO. Our third quarter performance reflects the effectiveness of our initiatives to achieve good sales in our Canadian and U.S. market. Sales that are slightly below the third quarter of 2022, which benefited from exceptional market conditions in the pandemic context.
For the 9 months to date, we reached sales of $1.3 billion, in line with last year. Our customer-focused business model and our diversified markets in North America are effective assets as are our innovation and value-added service strategies and our business acquisitions, which partly offset the internal decrease in sales compared to 2022.
Our EBITDA margin is lower than last year due to the return to pre-pandemic levels of operating expenses, [ exceptional ] external warehousing costs relating to temporary higher inventories level and the cost related to our expansion and modernization projects of some centers in the U.S. in order to accelerate future growth.
Our cash flow from operating activities was strong for the third quarter, generating $104 million. Our inventory is currently returning to more normal levels, which contributed to a positive effect on cash flow. We ended the period with a financial position that remains very solid.
Antoine will now review the financial highlights of the third quarter and the first 9 months, then I will conclude, and we'll take your questions.
Thanks, Richard. Third quarter sales have reached $192.8 million, down 2.9%, of which 4.6% from internal decrease and 1.7% from acquisitions. It's important to note that in the third quarter of 2022, Richelieu had achieved strong internal growth of 16%. In Canada, sales amounted to $270.1 million, down 3.4%, of which 6.4% from internal decrease, partially offset by a 2.1% positive contribution from acquisitions.
Our sales to manufacturers reached $219.9 million, down 3.6%; and for the hardware retailers, sales stood at $50.2 million, down 2.7%. In the U.S., sales grew to USD 141.6 million, down 5.6%. Sales to manufacturers reached USD 131 million, down 6.8%. In the hardware retailers and renovation superstores market, sales reached $10.6 million, up 12.8%.
In Canadian dollar, total sales in the U.S. reached $188.9 million, a decrease of 2.3%. For the first 9 months, sales reached $1.3 billion, down 0.8%, of which 2.8% from internal decrease and 2% from acquisition. In Canada, sales reached $780.6 million, down $20.6 million or 2.6%, of which 4.5% from internal decrease and 1.9% from acquisitions.
Sales to manufacturers reached $635.4 million, down $15.3 million or 2.4%. Sales to hardware retailers and renovation superstores reached $145.2 million compared to $150.5 million, down 3.5%.
In the U.S. sales amounted to USD 411.2 million, down 3.5%, of which 5.5% from internal decrease and 2% from acquisitions. They reached CAD 553.5 million, up 1.7%, accounting for 41% of total sales. Sales to manufacturers totaled $279.8 million, a decrease of $12.6 million or 3.2%, of which 5.4% from internal decrease and 2.2% from acquisitions.
Sales to hardware retailers and renovation superstores were down 6.5% compared to last year. Third quarter EBITDA reached $61 million, down $18.2 million or 23% over last year, resulting from lower sales and higher operating expense. EBITDA margin stood at 13.3% compared to 16.7% last year.
For the first 9 months, EBITDA reached $171.6 million, down 18.6%. As for the EBITDA margin, it stood at 12.9% compared to 15.7% last year.
Third quarter net earnings attributable to shareholders totaled $29.8 million, down 34.6%, mainly due to amortization resulting from business acquisitions and expansion projects, mainly in the U.S. including higher interest expense on lease obligations.
Net earnings per share were $0.53 compared to $0.83 last year, a decrease of 36.1%. For the first 9 months, net earnings attributable to shareholders reached $82.9 million, down 31.1%. Diluted net earnings per share stood at $1.47 compared to $2.19 last year.
Cash flows from operating activities before net change in noncash working capital balances was $48.5 million compared to $60.9 million last year. Net change in noncash working capital items represented a cash flow inflow of $55.1 million. Excess inventories continue to reduce as planned with a positive effect of $24.5 million. As a result, operating activities represented a cash inflow of $103.5 million in the quarter compared to a cash outflow of $2.7 million in 2022.
For the first 9 months, cash flows from operating activities represented a cash inflow of $192 million compared to cash outflow of $37.9 million last year. For the third quarter, financing activities used cash flow of $16.9 million compared to $17.2 million last year. Dividends paid to shareholders of the corporation amounted to $8.4 million compared to $7.3 million in the same period of 2022.
For the first 9 months, financing activities used cash flow of $52 million compared to $46.9 million in 2022. Dividends paid to shareholders amounted to $25.1 million compared to $21.8 million last year. During the first 9 months, we invested $42.5 million, $20 million for 6 business acquisition and $22.5 million, mainly for distribution center modernization and expansion projects, investments in equipment to maintain and improve operational efficiency as well as for IT infrastructure development.
We continue to benefit from a healthy and solid financial position with a working capital of $606.1 million for a current ratio of 3.4:1 and an average return on equity of 15.5%.
I now turn it over to Richard.
Thank you, Antoine. The integration of recent acquisitions is in progress as are the expansions and consolidation projects underway in our network. We have finalized the consolidation of our centers in the Atlanta and Nashville regions, and our Seattle center is now fully operational. We are also progressing with the Pompano center expansion and plan to complete the consolidation of our centers in the Calgary area in the first quarter of 2024.
We expect to end the year on November 30, 2023, with a sustained performance and a solid position by relying on successful strategy that have always served us well, namely ongoing innovation, value-added service, market penetration and business acquisitions, which are our key growth driver.
Thanks, everyone. We'll now be happy to answer your questions.
[Operator Instructions] Your first question comes from [ Ariana Millham ] with CIBC Capital Markets.
Richard, can you speak to what kind of organic decline you saw in September and when you expect return to positive organic growth?
What we see so far this year, I think, is very encouraging. If you remember well from the 2019 to the end of 2022, our sales have increased by 70%. The current performance is a clear demonstration though that we keep up with those market shares that we gained during the pandemic, and we're very happy about this. And we consider our performance very satisfactory in the circumstances for the current market.
That's helpful. And Richard, can you speak to the M&A pipeline and whether you've seen any moderation in vendor expectations?
Yes. The pipeline is quite healthy in the U.S. and in Canada as well. So we're working on some opportunities as we speak. But the M&A environment is still very positive for us.
Okay. And then just with respect to your excess inventories, when do you expect to work through them? And what are the risks of further price deflation as you look to normalize inventories?
Antoine will answer for the deflation. Regarding the deflation, there's going to be some deflation for certain products, mainly for those that come from Asia. But as a percentage, though, our gross margin should be maintained after we have -- we are past that -- we were through the excess of inventory. So basically, we look forward to make sure that we stabilize the situation with new inventory at the new costs. And then we're going to see growth for the margins and everything else coming in the future. On the short term, we have to live with that situation. But I think at the end of the first half of 2024, we should be through everything. Antoine?
Yes. And regarding inventory, we were down $65 million since the beginning of the year so far. We've mentioned that we were expecting $60 million to $80 million in 2023, it's going to be closer to [ $80 ] million. And we should probably see another $20 million somewhere in the first half of next year. So -- the inventory should come to a more reasonable level in the middle of next year.
Okay. Great. And just the last question I had was, Antoine, are you able to provide us with some perspective on what EBITDA margins you're targeting for 2024?
Yes. We're currently at 13%. And with the market conditions that we're seeing now, I think that the 30% -- 13% is a reasonable level of EBITDA.
[Operator Instructions] Your next question comes from Zachary Evershed with National Bank Financial.
It's actually Thomas calling in for Zach. [Audio Gap] consolidation of Nashville and Atlanta. And when do you expect that shows up in the results?
Yes. We just ended the consolidation of our Atlanta and Nashville centers. Our Seattle Center is now fully operational. So we should start to see benefits from those initiatives early next year.
Okay. Do you feel the environment has stabilized enough that we can call a bottom here?
So I think that's what -- I would say that we have visibility up to middle of next year, and we see the environment staying pretty flat as it is today.
I think that's the right answer from Antoine because what we see in the current situation, we don't see any positive sign as too. I don't think it's going to get worse, but we don't think it's going to get better anyways. But we -- as I explained at the beginning of the meeting, the fact that we maintain the market share that we've gained during the pandemic, I think it is very positive for us. So that means that our sales have increased and it has been compensated by an economy which is not as good. But our goal is to continue to work out in order to increase our market penetration and to make sure that if there is a sales decline that it's minimal, as we've seen so far. But that's really the goal of our teams, both in U.S. and Canada. There is a lot of work that's going to be do in order to keep up with those market share.
And last one for me here. I think previously, you mentioned $15 million in inventory reduction next year. You just called out $20 million in the first half. Is $50 million still the number for the full year?
Yes. The -- basically, this year is going to be slightly on the high side. So with the level of sales that we see today. $20 million for the first half is reasonable, and I think we'll see what happens after it.
There are no further questions. Please proceed.
If there's no more questions, thanks again. It's always a pleasure to talk to you and meet with you at your convenience. Thank you very much, and have a 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.