Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware first quarter results conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session, which will be restricted to analysts only. If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that the call is being recorded on April 8, 2021. [Non-English content].
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[Non-English content]. Thank you. Good afternoon, ladies and gentlemen, and welcome to the Richelieu conference call for the first quarter ended February 28, 2021. 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. We held this morning our virtual annual general meeting in attendance of the shareholders. We started 2021 with a strong first quarter, all the more satisfactory since historically, the first three months are the weakest period of the year.
As an essential supplier in this pandemic period, we met the challenge thanks to the strength of our customer-focused business model, our dedicated team, our innovation and value-added service strategy, including our one-stop-shop approach, the efficiency of our website, richelieu.com, and the fact that we serve a large base of more than 90,000 active customers in many diversified sector in the manufacturers and hardware retailers market, which is a significant asset. We also benefited from the contribution of our previous acquisitions and our new specialty markets. I would add that throughout this pandemic period, our team has made every effort to assist our clients as efficiently as possible in their projects. All these combined, we were able to see the opportunities of favorable conditions in the Canadian and U.S. renovation market, which is our main source of growth.
Our sales increased by 19.3%, consisting of a strong internal growth of 17%. Our two major markets, manufacturers and retailers, performed very well both in Canada and in the U.S. Our sales increased by 16.3% in our manufacturers market and by 34.5% in our retailers market and renovation superstore. EBITDA was up 53.4%, benefiting from increased sales and lower operating costs as a result of rigorous cost control, and diluted net earnings per share was up 76.2% over the last year. We continue to identify acquisition targets meeting our long-term value and creation criteria. After the end of the quarter, we acquired the shares of Task Tools, a distributor of power tool accessories and related products for retailers in Canada and in the U.S., operating two centers in B.C. and Ontario.
Combined with Mibro, acquired in 2020, this new acquisition allows us to expand our offering of this product line for the retailers and renovation superstore market in Canada and in the U.S. We also signed two agreement in principle to acquire two Canadian distributors. Together, these three new acquisitions would bring additional sales of approximately CAD 36 million per year. In addition, we are very pleased to have added solution centers in Rochester, New York, which has become our fifth center in this strategic market. I will now ask Antoine to go through the financial highlights of the first quarter, and will come back with additional comments. Antoine.
Thanks, Richard. First quarter sales reached CAD 297.6 million, up by 19.3%, of which 17.1% from internal growth and 2.2% from acquisitions. Sales to manufacturers stood at CAD 241.8 million, up by 16.3%, of which 13.6% from internal growth and 2.7% from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of CAD 55.8 million, up CAD 14.3 million or 34.5%, mostly resulting from internal growth. Those increases are the result of the favorable fallout from the strong demand in the renovation market. In Canada, sales amounted to CAD 193.2 million, up by 23.3%, of which 22.5% from internal growth and 0.8% from acquisitions. Our sales to manufacturers reached CAD 153.2 million, up by 20.2%, of which 19.1% from internal growth and 1.1% from acquisitions. As for the hardware retailers and renovation superstores market, sales stood at CAD 40 million, up 37%, all from internal growth.
In the U.S., sales grew to $81.9 million, up 16.4%, 11.8% from internal growth and 4.6% from acquisitions. They reached CAD 104.3 million in Canadian dollar, an increase of 13% and represented 35% of the total sales. Sales to manufacturers reached $70 million, up by 14.1%, 8.6% from internal growth and 5.5% from acquisitions. In the hardware retailers and renovation superstore market, sales grew by 31.9%, entirely from internal growth. First quarter EBITDA reached CAD 38.2 million, up CAD 13.3 million or 53.4% over the first quarter of 2020. Gross margin was maintained and the EBITDA margin reached 12.8% compared to 10% last year, due to the increase in sales and continued control of expenses. First quarter net earnings attributable to shareholders totaled CAD 21 million, up 78.3%.
Diluted net earnings per share rose to CAD 0.37 compared with CAD 0.21 for the first quarter of 2020, an increase of 76.2%. First quarter cash flow from operating activities before net change in working capital balances amounted to CAD 30 million or CAD 0.53 per share, an increase of 48.9%. We paid dividends of CAD 7.6 million to shareholders, representing a special dividend of CAD 0.0667 per share and a quarterly dividend of CAD 0.07, which is up 5% compared to last year. We repurchased common share for CAD 3.3 million and invested CAD 2.9 million for new equipment to improve and maintain operational efficiency. I now turn it over to Richard.
In conclusion, more than ever, we are committed to high standards of quality and reliability in our customer service. We continue to do our utmost to support our customers and their projects as efficiently as possible. Customer service, particularly in these difficult times, is the most important element in order to maintain and gain market shares. Under the current conditions, we strictly adhere to all recommended preventive measures to protect our employees, customers, and business partners as much as possible. Currently, more than 600 employees are still teleworking. Richelieu remains customers and innovation-oriented. We will continue to leverage our main growth drivers, namely our innovation and acquisition strategies. This is the most appropriate way to seize and create a possibility to achieve further good performance.
We are very well prepared and organized to meet the current possible challenge, such as labor shortage, getting product on time, rising shipping costs, and inflation. I take this opportunity to thank again our team and business partners for their supports. Thanks, everyone. We'll now be happy to answer your question.
Thank you . [Non-English content]. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. Should you wish to withdraw your question, simply press star followed by two. And if you are using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question. And your first question will be from [audio distortion] at CIBC. Please go ahead.
Thanks. Hi, good morning. Richard, can you tell us how sales were year-over-year in March and how they're doing so far in April? I believe last year COVID had not impacted March sales and then they plunged in April. Can you just tell us how maybe it's going so far?
Antoine, could you take this ball?
Yeah, no problem. March is, you're right. COVID started to hit us at the end of March, so last week of March. When we look at the current performance, it's still strong. On the industrial level, it's still double-digit growth and pretty much the same thing on the retailer side as well.
Actually, what we do, we compare ourselves with the 2019. We are established on some targeted sales. The guideline is 2019, the same period, and we establish what should be our sales in the month of March. Actually, things are doing very positive.
Okay, great. Just in the U.S., as there are areas where vaccination rates are picking up, are you seeing any changes in demand in those areas?
No, we see a constant growth in the U.S. The growth in the U.S. is not as strong as in Canada. Basically, we had a few areas in the U.S. in the last quarter that were not that strong. I can name here the Texas because of the storms. Illinois, for whatever reason, and Upstate New York. All the other regions in the U.S. were higher. The growth was higher than 15%. It is very positive in the U.S., and you see the trend in Canada is very clear. The market is very strong.
Okay, great. Thanks. That's all I have. Thank you.
Thank you.
Thank you. Once again, ladies and gentlemen. If you do have any questions, please slowly press star followed by one on your touch-tone phone. Your next question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Good afternoon, everyone. Congrats on a great quarter.
Thank you. Good afternoon.
Looks like great wins in sales to retailers in the quarter. Can you tell us if there was a high proportion of cyclical sales that won't repeat in Q2?
Well, we think that the market for the hardware retailer will remain very strong in the months to come. We see that. I think the consumers, they have, I think, some money at the bank. With the COVID situation not being better all across Canada, I think the trend is the people will continue to go to the hardware stores and buy some goods, as well as they also buy online. Regarding the other online customers that we sell to in Canada, we see our sales increasing by 49% so far this year. We see the market. We feel really that the market is going to continue to be very positive.
That's helpful. Thank you. Drilling down into the big increase in EBITDA margin in Q1, 280 basis points year-over-year. Can you give us an idea of how much was attributable to sustainable cost containment, and how much was better operating leverage, and what your views are on both of those going forward?
I think we have some cost reduction. I will let Antoine answer that. We see actually that our product mix continue to increase as well. Also our sales in the U.S. continue to increase. As a result of that, we see as a percentage, the EBITDA margin increasing. Antoine, maybe you can give more colors regarding the cost control.
Yeah, for sure. Of course, Zach, with the increased volume, that improved the EBITDA percent. On the cost control, we are still very rigorous around all the travel and living across North America. We're still benefiting from these measures in place. We'll take it as it comes, but as of now, we're still benefiting from these cost reduction measures.
Understood. Looking back over the last decade or so, Q2 margins have generally been 150 basis points- 200 basis points stronger than Q1. Given how strong Q1 was this year, do you still believe that seasonality will apply?
No, we should expect to see improved margin. We're talking about same-store sales, of course. If we're adding acquisition, that could change the mix. For the current business that we have, we're going to work hard to improve the mix, to get the synergies from the acquisition and be very rigorous on cost control. We should see an improvement in the margin.
Absolutely, it's going great so far. Your sales stepped up 19%, but your inventory has barely moved. Have international freight issues been causing any delays in shipments from Asia or Europe? Are you expecting to restock?
No, obviously, the freight increase is pretty important, but we're working hard to get the inventory in. What comes in, goes out. You're correct. Inventory increased, not as much as the sales, but we're doing everything we can to serve the customers.
On the topic of that increase in freight costs, how's the rollout of the price hike going so far?
I just missed the end of your question, Zach. Sorry.
Oh, sorry. How is the rollout of the price hike going so far?
We have already established some price increase. For the manufacturer market, it's within 24 hours, we can review our pricing. Regarding the retailers, we have a new price increase taking effect in early May. We will keep watching the market and the inflation. If there's some more increase that we have to do, we will do it later on during the year. As you mentioned, the freight is really an issue actually, it's more than double the cost. As a percentage of the cost of our product, it's not that high. Anyway, we keep changing our pricing as needed, every day if needed.
Thanks. On your acquisitions, very quick start to the year. Great to see that. How active is the pipeline for the rest of the year compared to that?
I will let Antoine comply for the pipeline. I think the pipeline is very healthy. Also, I'm very happy with the acquisition that we've made, like the Task Tools business, that would be a good combination with Mibro. That will strengthen not only our market presence with these products, and our sales force will certainly contribute to increase the sales tremendously. Also, we enforce our team management team in order to make sure that we continue to bring some innovation in this type of market. The new agreement in principle that we have that are not completed yet, though, basically, we have the same synergy with other Richelieu specialized product line and specialized division that we have. That would be very positive. We have very good fits. Those acquisition combined with what we already do will certainly increase the sales tremendously in the future.
Yeah, and the pipeline, Zach, it's still healthy. We have nice files open that we are looking at. Either in the U.S. and in Canada, either in the retailers market or the industrial market as well. Stay tuned.
Got you. Thank you. On the two undisclosed acquisitions, would they be active in the manufacturer's market or do they sell to retailers?
It's mainly retailers market.
Understood. Thanks. One last one for me. Are you noticing any increase in acquisition target expectations given how strong the renovation market is now?
We don't know, but actually Okay, Antoine, let's go.
No, not necessarily. Probably down the line it could happen, but as of today, we're not seeing necessarily more activity. We have a lot of nice opportunities in work, but I don't think that it's COVID related, so we'll see.
Maybe just to add to that, Zach, I think people after the COVID, maybe some people, as we already mentioned in other previous meetings, that after the COVID, maybe some entrepreneur will decide that they had enough challenges in their life and that maybe some more business will be for sale when they're more sellable, when they make some profits or they cannot sell at a higher price. Maybe we're going to see more possible acquisition. So far, as Antoine mentioned, the pipeline is very healthy and we're excited about what's coming up.
Thank you very much for answering the questions. I will turn it over.
Thank you.
Thank you. Next question will be from Rob Currie at Louisbourg Investments. Please go ahead.
Hi, guys. How's it going?
Going fine.
Great, thanks.
Good. Thanks for taking my question. Just wanted to ask about margins here. You talk about mix. We've talked in the past about how the mix, U.S. versus Canada having a better margin component to it. Gradually wanting to transition the U.S. to better margin sales over time. Is that playing a part here too? Is the U.S. being a driver here, or is it really just overall you're seeing better mix across the board?
It's U.S. and overall as well, and we see the product mix increasing as we push more and more on the higher margin products, and we see more and more results regarding EBITDA margin. There is such a huge potential in the U.S. for where we're hiring actually more people in order to sell more those higher margin products. That should bring some positive result. We're very positive as well with the margins in the U.S. that are getting closer and closer to the Canadian market. We're not there yet, but it's coming very favorably.
Yeah, that's helpful. When I think about your sales now and this mix change, is there anything that is fundamentally happening? Is this just a result of COVID volumes or is there a reason why the mix change is happening that you think is sustainable, that will still be there two, three years out?
It's a result of the effort that we invest in order to increase the sale of these products. We have not started just this year. This has been started many months and maybe a couple of years ago, mainly in the U.S. We see more and more of the result coming in, actually, and we're covering new markets, for example, the closet market. I see in the closet market, actually, our sales increased by 46% in Canada and the U.S. You see that if you remember a couple of years ago, we have invested in a new business that covered this market. This is completely compatible with the Richelieu product strategy. I know we see those increases, which is very interesting, and those markets are high margin market. I think that should continue on. We're increasing the sale for the regular products and pushing more and more the high margin products.
Yeah, that's helpful. I feel like I can't remember specifically, but I'm sure this has been asked over the past few quarters, but is there a concern that sales over the past few quarters have been a pull forward and we're going to see not just a drop in demand from this elevated level, but a drop below the run rate we were previously at? Do you guys feel pretty confident that this is just increased demand and it might come to a more normalized level later, but this is kind of still a demand that you expect going forward?
I guess a certain percentage of our sales may be temporarily increasing. I think overall, we see actually that Richelieu is increasing its market share. Even after the COVID, we're going to see, I think, better sales and we're gaining customers. Actually, we have to be very careful though, because we first serve the customer that further they have. We have many customers that we have added and some that wait for us to be added. Fortunately, regarding the procurement, we have a very good team in this department and I think we're successful actually to get products while our competitors have much more problem than we have. If you remember as well, at the beginning of the COVID, we told you we have not stopped our purchasing.
We have continued to push to make sure that we did not diminish our purchasing orders and that we keep increasing our inventory. You see actually that our inventory is about 30% higher than it was in the same period last year. Basically we have made, I think, our best effort in order to maximize our purchasing, to get the inventory, and we continue to do that as well. Actually, to make sure that for certain products, we're paying some air freight to make sure that we have, mainly for the seasonal products for the retailers, we have a budget actually for air freight and the additional cost caused because of those air freight are largely compensated by increased sales. You see the 35% for the retailers for the last quarter. Basically we're taking all the means that we can in order to better serve the customer.
The service makes all the difference. Our sales team actually, they keep communicating with our customers as well. If one product is missing, they contact the customers and they propose a product that will do the same job for them. This is another big advantage of Richelieu being a one-stop-shop. If we have a hinge , something like that might be out of inventory next week. We call the customer and say, "Hey, we have this alternative product that will do exactly the same job." Basically, we make sure that we don't miss any opportunity in regards of all the products that we have and the needs of our customers.
That's great. Last question I have for you is about M&A. Your currency has obviously improved here. Cost of capital is going down as your shares continue to rise. Does that change the way you guys think about capital allocation? Is it possible that you could go after a bigger fish and possibly use some equity? Do you still feel like this tuck-in situation that you guys have been doing for years is still the status quo? Just some update there would be great.
Yeah. What we see in the market as we speak is more tuck-in acquisition. If there's a larger fish to catch, and it's aligned with our long-term value creation, we'll go after it, that's for sure. For now, what we have in the pipeline are more tuck-in acquisition that fit perfectly with our long-term strategy.
Our line remains in the water just in case a big fish is interested to that line.
Sounds good. All right, thanks. We'll turn it over.
Thank you. As a reminder, once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. At this time, [Non-English content], we have no other questions registered. Please proceed.
Okay. If there's no more question, thanks again. It's always a pleasure to talk to you. Do not hesitate to contact us if needed. Bye-bye. Have a good afternoon.
Thank you. [Non-English content]. 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.