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Good afternoon, ladies and gentlemen, and welcome to the Richelieu Hardware Year-end 2018 Results Conference Call. [Operator Instructions] Also note, that the call is being recorded on Thursday, January 24, 2019. [Foreign Language]
Merci. Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the fourth quarter and 12-month period ended November 30, 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.In 2018, Richelieu continued to strengthen its leadership in its key markets in North America.For the first time, in 2018, Richelieu had slightly exceeded $1 billion in sales. We are very pleased with these milestones.Together, with our EBITDA of over $100 million and our almost debt-free balance sheet.Thanks to our innovation and acquisition, key strategies, our market penetration and development efforts and the safe synergy with our acquisitions. It's a strong step forward for the future.We are also pleased with the expansion achieved during the year with our 2 strategic acquisition in the U.S. which contributed to year's growth. One, allows us to expand and sustain our presence in Florida, where we now have 9 distribution centers.The other one strengthens our presence, product offering and customer base in the important financial market -- financial manufacturer market, while adding 4 distribution centers: 3 in North Carolina and 1 in Tennessee.Over the past 5 years, we have completed 14 acquisitions that have provided additional annual sales of more than $130 million.Overall, our markets performed well in 2018 and we achieved good growth.Let's look at financial highlights. Fourth quarter sales reached $258.5 million, up by 3.3%, of which, 1% was from internal growth and 2.3% from acquisitions.Sales to manufacturers stood at $224.2 million, up by 4.9%, 2.2% from internal growth and 2.7% from acquisitions.In the hardware retailers and renovation superstores market, we achieved sales of $33.3 million, down by 6%.In Canada, sales amounted to $174.6 million, stable with the same quarter of last year.Our sales to manufacturers reached $144.2 million, up by 2.3%. As for the hardware retailers and renovation superstores market, sales stood at $30.4 million, down by 9.5%, due to higher cyclical sales in the same period of 2017, and a substantial decrease in the level of purchases from one major customer in the fourth quarter compared to last year.In the U.S., sales totaled USD 61.4 million, up by 6.3%, 7.2% from acquisitions and an internal decrease of 0.9%, resulting from the termination of a supply agreement with the major customers as mentioned in previous quarter.At comparable sales, the internal growth would have been 8.6%. Sales to manufacturers reached USD 61.1 million, up by 5.3%, 7.5% from acquisition and an internal decrease of 2.2%, up 7.7% at comparable sales.In the hardware retailers and renovation superstores market, sales were up by 30.4%.Total sales reached CAD 84 million, an increase of 10.8% representing 32.5% of our total sales.Total sales in 2018 reached over $1 billion, up by 6.6%, 3.2% from internal growth and 3.4% for acquisition.At comparable U.S. exchange rates, the same period of -- in the same period of last year, sales growth would have been 6.9%.Sales to manufacturers reached $851 million, up by 6.4%, 2.4% from internal growth and 4% from acquisitions.Sales to other retailers and renovation superstores market stood at $153.5 million, an increase of 7.7%.In Canada, sales totaled $668.3 million (sic) [ $678.3 million ], up by 6.9%, of which, 4.1% from internal growth and 2.8% from acquisitions.Our sales to manufacturers amounted to $549 million, up by 8.3%, of which, 4.8% from internal growth and 3.5% from acquisitions.Sales to other retailers and renovation superstores grew by 1.3% to $128 million.In the U.S., sales amounted to USD 252.7 million, up by 7%, 2.2% from internal growth and 4.7% from acquisitions.We reached CAD 226.1 million, up by 5.9%, accounting for 32% of total sales.Sales to manufacturers reached USD 233.9 million, an increase of 4%, of which, 4.8% from acquisition and an internal decrease of 0.8% or an increase of 6.3% in comparable sales.Sales in the hardware retailers and renovation superstores market were up by 63.5% in U.S. dollars, resulting primarily from our market development efforts, the addition of new customers and significant cyclical sales.Fourth quarter EBITDA stood at $29.2 million compared with $30.1 million last year.The gross margin and the EBITDA margin were influenced by lower gross margin of certain recent acquisition due to their different product mix as well as lower sales in the Canadian retailers market. U.S. market development costs and the costs of introducing new products.The EBITDA margin stood at 11.3% compared with 12% in 2017.For the year, EBITDA was $106 million, up by 2.9%. The gross margin was slightly down from 2017, influenced by lower gross margin of some recent acquisition due to the different product mix. Considering the continued investment in market development, the reorganization of some distribution centers, the cost of implementing new technology and the cost of introducing new products, the EBITDA margin stood at 10.6% compared with 10.9% for 2017.Fourth quarter net earnings attributable to shareholders totaled $18.5 million compared with $20 million last year.Net earnings per share reached $0.32 basic and diluted compared with $0.34 for the same quarter of last year.For the year, net earnings attributable to shareholders reached $67.8 million.Net earnings per share were $1.17 diluted, up by 1.7%.Fourth quarter cash flow from operating activities before net change in noncash working capital balances were up by 5% to $23.4 million or $0.40 per share. Net change in noncash working capital balances represented a cash flow of $2.2 million.For the year, they were up 5.6%, totaling $84 million or $1.45 per share.Net change in noncash working capital balances used cash flows of $42.2 million, mainly due to investment in inventory as a result of adding new products in order to increase sales in the future.During the year, we paid dividends of $13.8 million, of which, $2.4 million were in the fourth quarter, and repurchased common shares for $26.5 million. We have thus distributed a total of $40.4 million to our shareholders in this year. We also invested $21.4 million during the year, of which, $9 million was for business acquisitions and $12.4 million for equipment to improve operational efficiencies and improvements to some buildings and IT equipment.As at November 30, 2018, cash totaled $7.4 million and our working capital was $329 million for a current ratio of 4.6:1.Turning to our outlook. Our financial strength allows us to pursue our innovation and acquisition strategies.We are very active and currently reviewing some very interesting acquisition opportunities.We continue to focus on operating profitability, efficient integration of our recent acquisition and market share gains in Canada and in the U.S.We are very confident to do well in 2019.That concludes my overview. And I will be happy to answer your questions.
[Operator Instructions] And your first question will be from Zachary Evershed at National Bank Financial.
First question for you is on the drop in retailer revenue, which came in at $34 million. Last quarter we talked about a quarterly run rate of about $40 million. You did mention a decrease in level of purchases from one major customer from last year in your prepared remarks. Did those sales get pushed forward to next quarter or are they nonrecurring?
Actually as I explained -- as I do explain in every quarter, we are dealing with the hardware retailers, dealing with that we have to also deal with cyclical sales. So last year, that particular retailer had a tremendous amount of promoting activities that generated a lot of sales in the last quarter and we also believe, it's a belief actually, that they also make some efforts to reduce their inventory because they have announced that they're going to close some stores in Canada. So we believe that there is some inventory reduction out of the year taking place, product particular customers. Will that continue for the whole year? I don't think so. I think we have only 2 quarters to live with that type of situation and after that, we see things coming smooth as usual because we have not lose any product or any space in each of the stores with that particular customer.
Thanks for the clarification. Moving on to the initiatives and new technology implementation benefit scheduled to appear in Q4, lifting margins. Looks like the impact was maybe masked or more muted than we were expecting. Can you speak to that and what the benefits will look like going forward?
Yes, being more muted is a good choice of words. I would say that actually we do have the reduction of a, what we call in our industry, the pickers, the people that just pick the items to be shipped to the customer. We do have that reduction, but this is actually offset by the introduction and the incoming of many new products into the inventory that created some turbulence in the receivings and other department in the warehouse, plus the fact that the players that we have spared due to the incoming of the auto stores is not finished yet in terms of reorganizing everything. So we expect that to go still for a couple of months. But the reduction of the labor that we have to get because of the auto stores, it's done, it's the past, and the rest we don't know what will be, the OpEx here in Montréal in the months to come, but it could probably be reduced, but to what extent? I don't know. But keep in mind that the auto stores have done its job, it's working pretty well. And I can tell you thing though, that the comment that comes from operating people actually, that without the auto stores, the last 6 months would have cost much more money to operate the warehouse because of the incoming new products and the -- also, the increase of sales in some area like the dot-com companies, for example, that does require, it's very profitable at the end of the month, but the -- it does require much more work in the warehouse because you have more shipping of 1, 2, 3 and 5 items at the same time from -- for 1 SKUs. So it does create more demand in the picking -- in picking efforts in the warehouse, so this is very nice because at the end of the year we're going to have more sales, it's going to be profitable. But we don't have other cost then -- the operating cost in the warehouse but we have to live with that.
Quick one on tariffs for you. Any update on the plan to increase prices to counterbalance tariffs? And have you gotten any kind of feedback from clients?
It's done already. So we -- our margin in the U.S. will take care of the new tariff. The price has been increased. We have order price increases that will take place in Canada in February. So basically, we keep up with our margin with the increased cost in Canada if we have any, as well as in the U.S. if we have any.
I see. Now how do you view your capital allocation priorities? You mentioned some very interesting opportunities in the pipeline that you're reviewing. Is M&A -- or M&A and the NCIB still top of the list?
Yes, M&A is definitely the priority. So the pipeline of acquisition is promising and the share buyback is also an option. So we have a share buyback program in place, but at the end of the day, for cash, priority is -- priority #1 is acquisitions.
Appreciate that. One more for me. We'd appreciate any additional color you can give us on your end markets and geographic performance?
Yes, actually, we have -- without the acquisitions, our sales in Eastern Canada, which is Quebec and the Atlantic, there's many clients in Atlanta area. We have to mention to you though that new further market is really, really, very, very low. It's worse than ever. But in spite of that, in Eastern Canada, our sales increased by 2.8%. Our sales in Ontario were flat. Our sales in Western Canada increased by 6%. So I think it's a really good performance in the Canadian market without acquisition. I would see if we look for a market segment, new kitchen manufacturers still bought for 4.4% more. The commercial woodworking, they were flat. We had the residential, financial and office financial that increased by 2%, and basically, that's the performance of various market segments, and general, for the retailers in Canada, it's down by 9.7% because of the -- what we have explained earlier.
[Operator Instructions] And at this time, Mr. Lord, we have no other questions, sir. Oh, I do apologize, we have a question from Valérie at Mackenzie.
You mentioned that you have a healthy pipeline of acquisitions. Could you maybe give us some color about the pricing and competition for these assets versus a year ago? Is it more of a buyers’ market or a seller market?
The multiples are similar to last year. And we don't see our creditors making an acquisition. I don't think -- I think -- Antoine, do you remember when the [Foreign Language] they made something like 5 years ago? 4 years ago?
Yes. And when it happens is more on the...
The board business.
The board business, yes.
Which is their lower-margin business. We try to concentrate on the hardware business and also to the board business, but we try to sell premium panels with which we can achieve much better gross margins. It's not that the margins as we can get with hardware, but it's very decent at the end of the -- at the EBITDA level.
Yes.
So the pipeline is LC, the multiple are similar to last year.
Okay. And you probably saw Sherwin-Williams reducing their estimates. Not sure if it was weather related, but it definitely saw a lot of weakness and when -- you don't seem to have seen that type of weakness. So is it because you're in different markets? Or painting, I would say, would probably be go along renovation and remodeling?
It's because we keep on investing in new customer development. When you make an acquisition, the first purpose, I'm pretty sure is to buy a customer list and add some products and add some talents to sell these products and establish the relationship with those customers. That's what we're looking for. We're lucky enough to be in the business where we can do some innovation. I just mentioned a little bit earlier that we have increased -- we have tremendously increased our inventory in the last 2 quarters of the last fiscal, but that's the way to make sure that we have a certain base to increase our sales in the future because if we would have stayed -- we would be the same company that we were 10 years ago, you would not have seen the figure at $1 million sales. So this is -- so I think, we're lucky enough to be in the market where there is a lot of innovation, new market to be conquered, new products to get from around the world, and there is a lot of room still for expansion in the North American market for us. So that's the reason why I think we not only had a growth in the past, but we will continue to have a growth in the future because we keep investing. Sometimes we have the trouble that comes with -- like we don't achieve like as mentioned earlier, the return on the auto store because the return is there but it's been muted -- I like the word, by other expenses in order to improve the business for the future.
Thank you. And at this time, Mr. Lord, we have no other questions, sir.
Thank you very much to all of you.
Thank you. 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.