Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Third Quarter Results Conference Call. At this time, all 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. Also note that this call is being recorded today, 10/08/2020.
Thank you. Good afternoon, ladies and gentlemen, and welcome to this conference call for the third quarter and nine month period ended 08/31/2020. With me is Antoine Eau Claire, CFO. As usual, note that some of today's issue will include forward looking information, which is provided with the usual disclaimer as reported in our financial filings. The third quarter was a period of strong growth and high profitability.
We achieved these results, thanks to our successful business strategy, notably the one stop shop approach, our manufacturers market in various segments such as kitchen cabinet, architectural woodworking, furniture, closet glass, door and window hardware, just to name a few. Our outdoor retailers and renovation superstore market, our wealth strategy that stands out with richeryou.com, our competent team and operational agility that allowed us to react quickly to the current environment. I would like to highlight the strong sales growth of 82.5% in the hardware retailers and renovation superstores market, stemming from the contribution of MyBow, acquired at the beginning of the year, which accounts for 36% and from a substantial increase in demand and higher cyclical sales in the quarter. As we speak, sales to other retailers represent 18% so far this year compared to 14.5% last year. Also point out that improvement in the EBITDA I also want to point out the improvement in the EBITDA margin to 15.8% compared to 12.6% last year and the 56.3% increase in diluted net earnings per share standing at $0.50 compared to $0.32 last year.
In addition, during the quarter, we concluded two new acquisitions for a total of five this year. Those acquisitions altogether will result in additional sales of over $70,000,000 on an annual basis. As announced last July, we acquired Central Wholesale Supply in Richmond, Virginia, which give us access to this new geographic market. Then on August 4, we acquired Lion Hardware in New Brunswick, specializing in window and door hardware products and serving all of Eastern Canada. In addition to extending our offering and customer base in this market segment, where we have already acquired two specialized distributors in 2019, Lion Hardware completes our Canadian coverage of this market segment.
Regarding the current pandemic situation, we continue to rigorously apply the measures required by the relevant authorities. In addition, we still have some 600 people 600 of our employees still working from home. We adjust our cost structure as the situation evolves. Approximately five percent of our workforce is still impacted by layoffs or reduced hours, and we are still limiting business travel by using technology such as video conferencing.
I'll now go to Antoine for the financial review. Thanks, Richard. Third quarter sales reached €311,200,000 up by 15.6%, of which 6.9% from internal growth and 8.7% from acquisitions. In Canada, sales amounted to $2.00 $3,000,000 up by 12.8%, of which 8.2% from internal growth and 4.6 from acquisitions. Our sales to manufacturers reached $154,300,000 up by 4.2%.
As for the hardware retailers and renovation superstores market, sales stood at $48,700,000 up $16,800,000 or 52.7 percent, of which 40.7% from internal growth and 12% from acquisitions. This significant increase is the result of major growth in the renovation market in Canada as well as higher cyclical sales than last year. In The U. S, sales grew to 80,600,000 in U. S.
Dollars, up $13,100,000 or 19.3%. Sales to manufacturers reached $68,700,000 an increase of 6% over the third quarter of twenty nineteen, of which 7.1% growth from acquisition and 1.1% from internal decrease. Sales in U. S. Dollar to hardware retailers and renovation superstores were up 340.7% compared to last year, including 247.4% growth from our Mybro acquisition and 93.3 from internal growth.
As in Canada, the renovation market in The United States has been growing strongly, resulting in a major increase in sales in this market. The company also benefited in the third quarter from higher cyclical sales. Total sales in The U. S. Reached CAD108.2 million, an increase of 21.2% and representing 34.8% of total sales.
For the first nine months of twenty twenty, sales totaled $808,800,000 up 4.1%, of which 7.4% growth from acquisition and 3.3% from internal decrease. In Canada, sales reached $514,900,000 up by $8,200,000 or 1.6%, of which 4.8% from acquisition and 3.2% from internal decrease. Sales to manufacturers reached 406,400,000.0 down $11,500,000 or 2.8%, of which 4.1% growth from acquisition and 6.9% from external decrease. Sales to hardware retailers and renovation superstores reached $108,500,000 compared to $88,800,000 up 22.2%. In The U.
S, sales amounted to $217,400,000 in U. S. Dollars, up 7.2%, of which 11.9% growth from acquisition and 4.7% from internal decrease. They reached CAD 293,900,000.0, up by 8.8%, accounting for 36.3% of our total sales. Sales to manufacturers totaled US190.4 dollars an increase of $5,300,000 or 2.9% over the same period last year, of which 5.2% growth from acquisition and 2.2% from internal decrease.
Sales to hardware retailers and renovation superstores were up 53% compared to last year. Third quarter EBITDA reached 49,100,000 up $15,200,000 or 44.8% over last year, resulting from significant increase in sales in the retailers market, together with action to reduce costs and government subsidies. Gross margin remained stable and the EBITDA margin stood at 15.8 compared to 12.6% last year. For the first nine months, EBITDA reached $107,700,000 up 20.8%. The gross margin remained stable.
As for the EBITDA margin, it stood at 13.3% compared to 11.5 last year. Third quarter net earnings attributable to shareholders totaled $28,700,000 up 56.6%. Net earnings per share were $0.51 basic and $0.50 diluted compared to $0.32 basic and diluted last year, an increase of 59.4%. For the first nine months, net earnings attributable to shareholders reached $58,100,000 up 22.8%. Diluted net earnings per share stood at $1.03 compared to $0.83 up 24.1%.
Third quarter cash flow from operating activities before net change in working capital balances amounted to $38,100,000 or $0.67 per share, an increase of 43.8% compared to last year, resulting primarily from the net earning growth. For the first nine months, they were up 21.2%, totaling $85,000,000 or $1.5 per share. For the third quarter of twenty twenty, financing activities used cash flow of $9,200,000 compared to $11,600,000 last year. Dividends paid to shareholders of the corporation amounted to $3,800,000 up 4.2%. For the first nine months, financing activities used cash flow of $19,900,000 compared to 29,100,000.0 in 2019.
During the third quarter, we invested $12,900,000 including $9,700,000 for the two business acquisitions. During the first nine months, we invested $42,300,000 of which $33,100,000 for the five business acquisitions and $9,200,000 primarily for the purchase of equipment to maintain and improve operational efficiency. We continue to benefit from a healthy and solid financial position, cash balance of $74,500,000 almost no debt, and working capital of $376,200,000 for a current ratio of 3.6 to one. I now turn it over to Richard. Thank you, Adoine.
We remain quite confident,
but still watchful. Looking back at September, we can see an upward trend in the manufacturers market and still very strong in the hardware retailers and innovations of personal market. But we understand this is due to exceptional circumstances. We continue to build on our strengths and value added concept in order to provide distinctive and outstanding service to our customers. With the business model well adapted to customer needs and a sound financial position, Richelieu is well positioned to pursue its innovation, market penetration and acquisition strategy, which are our main growth drivers.
We also announced that this morning, the Board of Directors approved the payment of a quarterly dividend of $6.67 per share payable on November 5. In conclusion, I would like to thank our team and business partners for their support in this challenging period. Thanks everyone. We'll now be happy to answer your questions.
Merci. Thank you. Ladies and gentlemen, if you do have a question, please press followed by 1. Also be reminded that questions will be limited to analysts today. Once you have pressed star 1, you will hear a three tone prompt acknowledging your request.
And your first question will be from Amir Patel of CIBC Capital Markets. Congratulations
on the strong Q3 results. Richard, you you gave some comments on how September was fearing qualitatively. Could you quantify how your sales fared in the month of September?
Yes. I could say that I think we our sales to manufacturers are with, I would say, around 5% increase. And I guess this trend should continue at least until, I would say, Christmas, which we don't know after Christmas. As far as for the hardware retailers, the market remains very strong, maybe not as strong as it was in the last quarter, but still very strong. So we expect a very good growth in this market as well.
Okay, great. Thanks. That's helpful. And Antoine, did you had the I think it was 3,000,000 just over $3,000,000 of government grants in Q2. How much did you get in Q3?
And would you expect to get anything in Q4?
3,500,000.0 in Q3 and nothing in Q4.
Great. That's helpful. And Richard, when we look at the EBITDA margins, clearly a step change over the last two quarters, the 15.8%, do you think you could sustain that into Q4? And as the hardware retailers market maybe normalizes year, what's your objective for long term margins?
I think the margin the EBITDA margin should still be very good in the third in the fourth quarter. And but I would say, if we know when the situation come back to normal, think the better comparison that we can have is with 2019. But for the time being, in the short term, yes, the margin will continue to be strong. It's just the our gross margin is rather stable. I think the increase in EBITDA margin is the result of reduced expenses and the additional sales, mainly in the retailers market that brings without increasing our expenses much.
Still have to mention also that we spend more because I think all the distribution centers are very good to our retailers are working seven days a week since two months. So it does increase the expenses to a certain extent, but it's minimal compared to the positive effect of those additional sales on the EBITDA margin.
Okay, great. Thanks. That's all I had for now. I'll get back in the queue.
Thank And your next question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Thank you. Good morning, everyone. Congratulations on the quarter. Thanks. So for retailer sales, mentioned that the current quarter will be a little less strong than last quarter.
Can you help us understand the performance throughout Q3, perhaps when the peak in retailer sales was?
Yes, maybe we can say it's a peak. It's been a very strong period and the cyclical sales were quite high. We don't expect that in the fourth quarter. But for the regular sales, think the type of growth that we had in the third quarter should continue on, maybe not to be as high, but still be quite, quite I would say very high in the circumstances. So it's much, much over 25%.
Thank you. And with Lion Hardware, you've completed your Canadian coverage for windows and doors.
Do you
have a next area of interest that you'll be looking to flush out your coverage in?
Yes, we still have other targets to improve our market results in Canada. And now we maybe we'll be open to make that type of acquisition in The U. S. As well.
Okay. That's interesting. And in terms of the pace that you're on, you've been doing exceedingly well this year compared to your historical average. Do you see yourself maybe expanding the range of targets looking for larger acquisitions in the future?
Anything that is moving that would be interesting for us, we will target. But actually, we still work within the same range because this is what is available in the market, but we keep our eyes open. If eventually something bigger comes to our attention, you can be sure of one thing. We're going to make our decision analysis to justify a possible acquisition.
Thank you. That's helpful. And one last one for me. In terms of your negotiations with acquisition targets, has COVID brought in any changes to the structure of the deal, maybe a difference in the earn outs or just a different caliber of negotiations, I guess?
No. So far, it has not changed anything. We expect maybe after the COVID that there would be more company for sales because the people that have been in business for thirty or forty years, maybe they have enough of the various crisis, but we have to get through in the financial and the business market in North America.
Next
is a follow-up from Amit Patel.
Richard, this year, a lot of the growth looks like it's been fueled by volumes. As you look out to 2021, do you see room for price to be a lever to pull for sales growth?
No. They have been the pricing. So far this year, the pricing has been rather stable. You're talking about the pricing of the products?
Correct.
The acquisitions? Okay. The product No. No. It's the product pricing.
Yes. It's been rather stable, but we see now that the steel price has started to increase. So that could be one of the reasons why our suppliers might increase their selling price. So as a result of that, we should if it does happen and it will certainly happen, I would say, the course of the next three to four months, we will have to increase our pricing accordingly as well. So that should not affect the gross margin of the Scherger, if not maybe temporarily for a few weeks.
Right. But I guess higher prices would be a positive. So is that would it be Yes.
That's a good answer. Yes.
Would it be sort of like mid single digits
We don't know. We don't know yet. I think it could be between 47%. We don't know yet.
Okay.
And not for all the product, for certain products, mainly the product coming from Asia.
Okay. No, that's helpful. And then just digging into on the retailer side, the 46% organic growth, how much of that was underlying demand? And how much of that was just the timing of the large cyclical customer?
Don't tell me the exact figures. It's mainly with the regular customers, actually.
Yes. The cyclical I mean, the cyclical sales represent 5% of the 40. So it's the
rest is the Basically the demand for the bigger product that we have in store. That's it.
Okay. Now that's helpful. And Richard, I was just wondering if you could give us an overview of how you where you think your market share stands today across the different categories in Canada and The U. S. Because it seems like you must be picking up market share this year.
And I don't know if you'd agree with that.
We do actually, we I think also that we do we're capturing more market share because our sales force kept working over the phone contacting customers and we would keep innovating with the products. We are a one stop shop. And I think we made the right decision in last March that that decision was to make sure that we don't decrease our purchasing inventory. Even though as a result, strong sales, you see a decrease in our inventory and a higher turnover of our inventory, but because we were not expecting such an increase with our retailers. So basically, our market share with the retailers for the product that we sell in Canada is probably 70.
And for the manufacturers, I would say 70% to 70%, the same thing in Canada. In The U. S, we're still small. I think in the area where we have been for more than five years of market share, probably 20% and the other the new area, it's about 5%. So that's good news because we can't do nothing but increase those sales in the future.
Regarding the retailer in The U. S, we're not even touching the market yet. We're going to sell how much this year around $130,000,000 mainly thanks to the Marlboro acquisition. But Marlboro give us a good way to increase our sales in The U. S.
Because they have more representatives, they service more customers. So the end result of that acquisition in The U. S. Regarding the repair should be very good.
Great. Thanks for that. That's all I had. I'll turn it over.
Thank you. And at this time, Mr. Lau, we have no other questions registered, sir.
So it was a real pleasure to talk to you. So you're welcome to call us on the phone if you have any more questions. We are at your disposition. So thank you very much.
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.