Richelieu Hardware Ltd. (OTCPK:RHUHF) Q3 2022 Results Conference Call October 6, 2022 2:30 PM ET
Company Participants
Richard Lord – President and CEO
Antoine Auclair – CFO
Conference Call Participants
Hamir Patel – CIBC
Meaghen Annett – TD
Zachary Evershed – National Bank
Operator
Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Third Quarter Results Conference Call. At this time, all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, which will be restricted to analysts only. [Operator Instructions] Note that the call is being recorded on October 6, 2022. [Foreign Language]
Richard Lord
Merci. Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu’s conference call for the third quarter and first nine months of fiscal 2022. With me is Antoine Auclair, CFO. As usual, note that some of today’s issues include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings.
In line with previous periods, we achieved a strong third quarter with a 26.7% increase in total sales, to which our Canadian market segment contributed as well as our U.S. manufacturer market, where we realized a sharp rise of 51% in U.S. dollar, of which 32% came from acquisitions. We posted an EBITDA increase of 23.8% with an EBITDA margin of 16.7% and net earnings per share increase of 18.8%. This performance helped drive our total sales for the nine months, up 29.1% to $1.3 billion and net earnings per share increased by 27.2% to $2.19. We ended the period with a sound financial position, including a return on average equity of 24.1%.
Richelieu has always been careful to maintain a natural ability to react and adapt to market conditions, which contributes our sound financial track record over the years. Furthermore, we are driven by a combination of key strengths including the efficiency of our business model, especially designed to meet the needs of our Canadian and U.S. customers, and anticipate their expectation through our obsession with service and our resolute focus on innovation.
The diversification of our market segment is also a great strength. And we continue to add strong leverage with our acquisition in North America where it has been completed since 1988. In this regard, we recently concluded a fourth acquisition of the financial year Quincaillerie Deno, Anjou, Quebec. We also signed three agreements in principal for two acquisitions in Canada and one in the U.S. Together, these four transactions should add approximately $23 million in annual sales.
I will now hand over to Antoine for a review of the quarterly results and the financial situation.
Antoine Auclair
Thanks Richard. Third quarter sales reached $472.9 million, up 26.7% of which 15.8% from internal growth and 10.9% from acquisitions. At comparable exchange rate to last year, sales increase would have been 24.9%. In Canada, sales amounted to $279.6 million, up 14.8%, mostly from internal growth. Our sales to manufacturers reached $228 million, up 15.7% of which 14.5% from internal growth and 1.2% from acquisitions.
For the hardware retailers, sales stood at $51.6 million, up 11.2%, entirely from internal growth. In the U.S., sales grew to US$150 million, up 43.7%, 15.3% from internal growth and 28.4% from acquisition. Sales to manufacturers reached US$141 million, up 50.7%, 18.7% from internal growth and 32% from acquisitions. The hardware retailers and renovation superstores market sales reached US$9.1 million.
In Canadian dollar, total sales in the U.S. reached $193.3 million, an increase of 48.9% and representing 41% of our total sales. For the first nine months, sales reached $1.3 billion, up 29.1% of which 16.2% from internal growth and 12.9% from acquisitions. In Canada, sales reached $801 million, up $116.5 million or 17% of which 12.8% from internal growth and 4.2% from acquisitions. Sales to manufacturers reached $650.7 million, up $98.2 million or 17.8%. Sales to hardware retailers and renovation superstores reached $150.5 million, compared $132.2 million, up 13.8%.
In the U.S. sales amounted to US$426.1 million, up 49.2% of which 20.3% from internal growth and 28.9% from acquisitions. They reached C$544.1 million, up 52.2%, accounting for 40.4% of our total sales. Sales to manufacturers totaled US393.6 million, an increase of US$143.9 million or at 57.6% of which 24.8% from internal growth and 32.8% from acquisitions. Sales to hardware retailers and renovation superstores were down 9.7% compared to last year.
Third quarter EBITDA reached $79.2 million, up $15.2 million or 23.8% over last year, resulting from increased sales. Gross margin declined slightly due to acquisition and the EBITDA margins stood at 16.7%, compared to 17.1% last year. For the first nine months, EBITDA reached $210.8 million, up 29.3%. As for EBITDA margin, it stood at 15.7%, compared to 15.6% last year.
Third quarter net earnings attributable to shareholders total $46.4 million, up 19.6%. Net earnings per share were $0.83 basic and $0.82 diluted compared to $0.69 basic and diluted last year, an increase of 20.3% and 18.8%, respectively. For the first nine months, net earnings attributable to shareholders reached $123.4 million, up 27.1%. Diluted net earnings per shares to that $2.19 compared to $1.72, up 27.3%.
Third quarter cash flow from operating activities before net change in working capital amounted to $60.9 million or $1.08 per share, an increase of 23.5%, resulting primarily from net earnings growth. Net change in non-cash working capital used cash flow of $58.2 million, mainly reflecting increase in inventories of $92.6 million resulting from higher demand, cost of supply increase and reduced delivery delays from Asia.
Change in account receivable and other items represented cash inflow of $34.4 million. Consequently, operating activities represented a cash inflow of $2.7 million. For the first nine months cash flow from operating activities before net change in working capital were up 28.9%, totaling $162 million, or $2.91 per share. Net change in noncash working capital balances used cash flow of $202 million, primarily representing changes in inventory that used cash flows of $190.9 million and accounts receivable and other items used cash flow of $11.1 million. Consequently, operating activities used cash flow of $37.9 million compared to a cash inflow of $90.3 million last year. For the third quarter, financing activities used cash flow of $17.2 million compared to $80 million last year.
Dividend paid to shareholders of the Corporation amounted to $7.3 million compared to $2.9 million in the same period of 2021. For the first nine months, financing activities used cash flow of $46.9 million compared to $41.8 million in 2021. Dividends paid to shareholders amounted to $21.8 million compared to $15.5 million last year.
During the first nine months, we invested $59.2 million for the three business acquisitions made in the first quarter and $16.8 million for the purchase of equipment to maintain and improve operational efficiency as well as investment in IT infrastructure and network expansion projects. We continue to benefit from a healthy and solid financial position with the working capital of four $525.7 million for a current ratio of 2.8 to 1 and an average return on equity of 24.1%.
I now turn it over to Richard.
Richard Lord
Thanks Antoine. To conclude, in the U.S., in addition to the ongoing expansion of our Fort Myers, Atlanta and Chicago centers, we have started the expansion of our Pompano and Nashville distribution centers, and will open new centers in Carlstadt, New Jersey, and Minneapolis.
Regarding the recent event in Florida and talking about the hurricane, we are happy to report that our location suffered minimal damages and everyone is safe, and we are fully operational. We are pursuing the integration of our recent acquisition while remaining on the lookout for opportunities in the acquisition market that fit our short — our long term career. We are still working on penetrating strategic market and will continue to adapt as efficiently as possible to market conditions, whatever they will be. We expect to end the financial year with good results.
Thanks, everyone. We’ll now be happy to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question will be from Hamir Patel at CIBC.
Hamir Patel
Good afternoon. Richard and Antoine, could you comment on the growth rates you’ve seen in September with manufacturers and retailers?
Richard Lord
What we’re seeing as we speak is still overall double-digit growth in the U.S. and I would say about 6% to 7% growth in Canada. That’s about for the month of September. And October should be all right as well as November. When we have to expect the month of December and January, usually our slowest month as usual, the first three months of the year — of the fiscal that we show you is always sure because of vacation, Christmas season and everything else. But so far, so good.
Hamir Patel
Okay. No, that’s helpful. And Richard, was that sort of consolidated, or was that just the manufacturers piece? And maybe if you can comment how the retailers business is…
Richard Lord
Well, I was speaking about manufacturers, but the retailers growth is about the same that we’ve seen since the being of the year, rather low, but it’s still positive.
Hamir Patel
Okay, great. And Antoine, are you able to break down the 16% organic growth, how much of that was price versus volumes?
Antoine Auclair
I would say that the price would be like a 12% to 13% is price.
Hamir Patel
Okay. And are you seeing any signs of prices starting to moderate as you move into Q4?
Antoine Auclair
What do you mean in terms of sales price?
Hamir Patel
Yes. Yes.
Antoine Auclair
Yes. Sales price, it’s all behind us. So, what you see now is what you’re going to get in Q4, if nothing else changed.
Hamir Patel
Okay. And just the last question I had was just on the EBITDA margin side, very strong quarter, 16.7%. I know last — on the last call, you said you expected them to normalize in the high 14% to 15% range. But the longer you’re staying over 16%, are you starting to reassess where you see long-term margins?
Antoine Auclair
No. My comments will be the same. So, as long as we stay around those 15%, 16%, 17% internal growth, we will continue to see strong 16% margin. But in a more normalized environment, we would have a more normalized growth. High 14% to 15% should be the norm.
Operator
Next question will be from Meaghen Annette at TD.
Meaghen Annett
The inventory balance is up substantially year-over-year. Can you just break down some of the key drivers of that growth? Can you also talk about how you’re thinking about inventory planning for the coming year just in light of the potential for change in consumer purchase patterns and whatnot? It looks like there was also investment in inventory in the quarter. Just want to get a sense of how you’re thinking about inventory planning.
Richard Lord
Yes. The inventories increased materially since the beginning of the year. So, a $200 million increase. If you want to break that out a bit, so $50 million comes from price increase. So just the increase of the — price increase of our product explains $50 million of this increase. $30 million is coming from acquisition and our other expansion project. The rest is growth and supply chain disruption. So, we definitely have — are in an excess inventory position as we speak. So the delays in getting the inventory is reducing in Asia. So the material is what we placed 9 months ago was coming in, we should be at this level until the end of the year, and it will start reversing early 2023.
Meaghen Annett
And in evaluating potential acquisition targets, are you seeing any changes in valuation at this time, or any change in the willingness of targets to sell?
Richard Lord
No. Valuation is pretty much the same as what you’ve seen in the past 4 to 6 times. And if we enter into a more difficult position, this would probably create more opportunities on the acquisition front. But the network, the pipeline is still healthy, and we will try to tell why that as you — it’s still good.
Meaghen Annett
Okay. And just last question. With regards to some of the damage that might have been incurred in Florida, can you just talk to how your business performs when there are potential opportunities created by unfortunate events such as this?
Richard Lord
Well, that will certainly create some opportunities, but we don’t expect any turbulence in this market — in our market in Florida because of that. I think we have quite a big share of the market in Florida. We have 9 distribution centers over there. So, whatever business that is going to be available in addition to what we already have will be captured by us. But usually, that kind of storm, they don’t destroy — the good houses are not going to be the destroyed. Usually, this is where you find the nice kitchen cabinet, nice closet, nice bathroom as well. Basically, we don’t expect much from that. But really if there are some opportunities, we’ll be there to capture them.
Operator
[Operator Instructions] And your next question will be from Zachary Evershed at National Bank.
Zachary Evershed
Are contractors still in high demand given the strength that you’re seeing in manufacturers? And is there still a shortage of skilled labor among your customers?
Richard Lord
Yes. There is a labor shortage for them, but I mean many customers personally. And usually — they really choose the orders that they want to make because they have less employees, so they’re going to choose to go for the kitchen cabinet, or the bathroom or the closet. They’re going to go for the more expensive projects, so they can make more money. And the more expensive is the project in kitchen, cabinet, closet, and the vanity, furniture in the bathroom, it’s because it’s — there is more Richelieu content. So that does create good sales for us for the higher-end products. So basically, this is positive.
And this is what we see now, and that should continue for a while. And a customer speaking to our sales force, we know that they are still busy for a few months. And as I said earlier, there can be a slowdown in December and January as usual because this is — first quarter is always the weakest. But we expect the business to continue to be good because there’s still a lot of commercial projects as well on the go in Canada and in the U.S. That should bring interesting set as well because we have to keep in mind that commercial projects account for 25% of our sales. And this is a fast — the growth in this market, as we speak, is something like 15%, which is good.
Zachary Evershed
Great color. Thanks. And then, if we think about that busyness that they have for a few months of visibility accounting for, of course, the December and January slowdown. If we compare that to what they’re thinking and saying last quarter before the Fed kind of took you by surprise with higher rate hikes. Obviously, that doesn’t translate directly to renovation and remodel. But how is the — I guess, the delta, the change in the backlog that your clients are seeing?
Richard Lord
Our clients, they don’t have much back. Usually have a work for about three months in and that’s all what we can see. But I don’t think that the interest rate, whatever happened in the economy have changed the need for some consumers to change their kitchen cabinet or improve their house. So — but we don’t have that feeling yet, but we will — like you, I think, we are realistic. We don’t know what’s coming.
As we said earlier, we can have a smoother growth in the few months to come. But we never know. We captured new business. I have personally met a couple of retail customers last week that are going to give us a few million dollars additional business. And we see the big manufacturers also are still busy. They keep calling in. They convert their products. We just added new customers. I already mentioned to you that we had a big customer in the U.S. in the closet industry that has 500 stores. Actually, we’re just about to have a new deal with a similar company in the U.S. as well for — in the closet business. So basically, we have a lot of positive news regarding increased sales of market — additional market penetration. We have to keep working in that direction.
Zachary Evershed
That’s actually a great point. You guys made a good tactical decision to keep inventory in stock and that won you a ton of market share when supply chains are current. Are you seeing any of those new customers going back to their old suppliers as supply chains untangle?
Richard Lord
Yes, they will certainly go back to their former suppliers, some of them. But they will continue to deal with us because they have discovered that we have the largest variety of products as well as probably the best service available in North America as we speak. So that should continue on. And we have a big sales force in the U.S. as well as in Canada. The job of these guys is to make sure that the customers stay loyal to Richelieu.
Zachary Evershed
Fantastic. And then, just one last one for me. In the past, you’ve said that U.S. margins were trending at about two-thirds of what Canada was. Does that still hold true today?
Richard Lord
Yes.
Operator
And at this time, Mr. Lord, we have no further questions. Please proceed.
Richard Lord
Thank you very much for attending. It’s always a pleasure to talk to you. Do not hesitate to call us for more information. Bye, bye.
Operator
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.
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