Good afternoon, ladies and gentlemen, welcome to the Richelieu Hardware first quarter results conference call. At this time, note that all lines are in a listen-only mode. Following the presentations, we will conduct a question and answer session, which will be restricted to analysts only. If at any time during the call you require immediate assistance, please press star zero for the operator. Also note that the call is being recorded on April 9th, 2020.
[Non-English content] Bonjour, mesdames et messieurs, et bienvenue aux résultats du premier trimestre de Richelieu. Présentement, vos lignes sont en mode écoute seulement. Suite à la présentation, nous allons procéder à une période de questions et réponses qui sera restreinte aux analystes seulement. Si vous avez besoin d'assistance au cours de l'appel, veuillez appuyer star zéro pour le téléphoniste. V euillez aussi prendre note que cet appel est enregistré le 9 avril 2020. J'aimerais maintenant céder la parole à Monsieur Richard, Président et Chef de la Direction. La parole est à vous.
[Foreign language] Thank you. Good afternoon, ladies and gentlemen, and welcome to the Richelieu conference call for the first quarter ended February 29th, 2020. It is to be noted that Antoine and I are attending from different locations via telephone. 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 view of the current circumstances, this morning, we held our annual general meeting in attendance of the proxy holders. In accordance with strict guidelines issued by government health authorities, we respectfully ask our shareholders to refrain from attending the meeting in person. As such, our shareholders have participated by voting by proxy, and they have the possibility to ask a question using two options made available to them.
As we mentioned in our press release, Richelieu will continue to monitor the COVID-19 situation closely and to comply with all applicable health and safety guidelines issued by our governments and authorities. I will come back to this point after our financial review. Regarding our first quarter ended February 29th, we are very pleased with our growth of 10.2% in sales, 18.9% in EBITDA, and 18.4% in net earnings attributable to shareholders. We benefited from the strong contributions of our acquisitions added to a positive internal growth in our main market segments. We are pleased to see that our sustained innovation and acquisition strategies, combined with our market development initiatives, our unique service concept, and the depth of our product lines positively impacted the quarter's performance. Furthermore, during the quarter, we made three new acquisitions in Canada and in the U.S.
That meet our growth expansion criteria and give us access to new geographic markets, while strengthening our activities in markets where we were already present. The three acquisitions had approximately CAD 60 million in sales on an annual basis, as well as new customers, products, and expertise. They are Decotec, acquired in December 2019, which serves a customer base of Canadian manufacturers. Mibro, also acquired in last December, which serves a customer base of retailers in Canada and in the U.S. The last one acquired on February the 3rd, Omaha Hardwood, which serves mainly manufacturers and operates three centers in Nebraska, Iowa, and South Dakota, giving us access to these new geographic markets. As we always do, we will create sales synergy with the new acquisition through our network, which now counts 82 centers in North America.
To conclude this overview, in an effort to protect Richelieu's current cash position and mitigate financial impact likely to result from the COVID-19 crisis, this morning, the board of directors has elected not to declare annual dividends for the first quarter of 2020. 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 249.4 million, up by 10.2%, of which 3.5% from internal growth and 6.7% from acquisitions. At comparable U.S. exchange rate from 2019, sales growth would have been 10.6%. Sales to manufacturers stood at CAD 210.5 million, up by 9.5%, 4.8% from internal growth, and 4.7% from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of CAD 38.9 million, up by CAD 4.9 million or 14.4%, of which 18.5% from acquisition and internal decrease of 4.1% caused by the decrease of sales to retailers in the U.S. In Canada, sales amounted to CAD 156.7 million, up by 9%, of which 3% from internal growth and 6% from acquisitions. Our sales to manufacturers reached CAD 127.6 million, up by 8.4%, of which 2.2% from internal growth and 6.2% from acquisitions.
As for the hardware retailers and renovation superstores market, sales stood at CAD 29.1 million, up 11.9%, of which 3.7% from internal growth and 8.2% from acquisitions. In the U.S., sales totaled $70.3 million, up 13%, 5.1% from internal growth and 8.2% from acquisition. They reached CAD 92.7 million, an increase of 12% and represented 37.2% of the total sales. Sales to manufacturers reached $63 million, up by 12.1%, 9.8% from internal growth and 2.3% from acquisitions. In the hardware retailers and renovation superstores market, sales grew by 23%, of which 61.3% from acquisition and 38.3% of internal decrease caused by higher cyclical sales and initial sales made last year. First quarter EBITDA reached CAD 24.9 million, up by CAD 3.9 million or 18.9% over the first quarter of 2019.
The gross margin was maintained and the EBITDA margin improved due to increase in sales and continued control of expenses and stood at 10% compared to 9.2% same quarter last year. Amortization expenses for the first quarter of 2020 was up CAD 1.1 million due to the increased amortization expense resulting from our latest business acquisitions. First quarter net earnings attributable to shareholders total CAD 11.8 million, up by 18.4%. Diluted net earnings per share rose to CAD 0.21, compared with CAD 0.17 for the first quarter of 2019, an increase of 23.5%. First quarter cash flow from operating activities before net change in working capital balances amounted to CAD 20.1 million, or CAD 0.36 per share, an increase of 19.1%. For the first quarter of 2020, dividends paid to shareholders amounted to CAD 3.8 million, up 3.8% over 2019.
We also invested CAD 26.5 million, of which CAD 24 million for the three business acquisitions mentioned earlier, and CAD 2.4 million for new equipment to improve and maintain operational efficiency. Richard?
Thanks, everyone. In this difficult time, our priority is to take all appropriate steps to ensure the safety of our employees, suppliers, customers, families, and visitors while continuing supporting our customers. In this regard, we make sure that we comply and exceed all guidelines from governments and authorities. COVID-19 has a serious impact on our business. In most jurisdictions, all operations except three in Quebec continue as essential services and comply with local jurisdictions. We remain active wherever appropriate and authorized and have reorganized our activities in order to focus on essential services with most of our locations still being in operation with, however, a reduced number of resources.
All locations have been operating under strict procedures intended to minimize contact between individuals and other sanitization procedures. March sale was strong in the first half, but we started to see a decline toward the end of the month.
Based on the last few days' trend, our consolidated sales are negatively impacted by approximately 40%, resulting from a decline of 45% in Canada and 30% in the U.S. Most restricted, we are experiencing a decline of 75% in Quebec, 30% in Ontario, 25% in Western Canada, and 25% in the Atlantic provinces. We took important and difficult measures to adjust the cost structure accordingly, including workforce reduction, reduced hours, and the complete closure of three locations. We also reduced board of director fees and my CEO remuneration by 25% and other managers by 20%. We currently have over 600 employees working from home, thanks to our IT department. We are closely and rigorously monitoring cash flows on a daily basis. We are currently analyzing all government support programs that could apply to Richelieu in the future.
More than ever, we make sure to keep our business model well-adapted to the needs of our customers in Canada and the U.S. in order to meet their needs and not disappoint their expectation, especially in these difficult market conditions. Keep in mind that our network of 82 interconnected distribution centers, combined with our transactional website, which is also exceptional, allow us to ship from every location across North America in a very short period of time. Richelieu's value-added concept is still based on our diversified and unique product offering, our distinctive multi-access service, our exceptional online service with richelieu.com, and the strong expertise of our team. Our strong balance sheet and cash position will certainly help us to get through these difficult times. Thanks, everyone. We'll now be happy to answer your questions.
Thank you. Ladies and gentlemen, we will now take questions from analysts. If you would like to ask a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you'd like to withdraw your questions, you will need to press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. Your first question will be from Hamir Patel at CIBC Capital Markets. Please go ahead.
Hi. Good afternoon. Richard, thanks for those preliminary figures. I may have missed something. Can you just remind us again what you were saying your quarter to date aggregate sales were tracking?
Actually, we track our sales in the last five days to make sure that we analyze the very current trend. As I mentioned, our sales decreased by 40%. It's 45% in Canada and 30% in the U.S. This is the clearest trend. That seems to be stable five days after five days regarding the way that we analyze it.
Okay.
If I can add, Hamir, like Richard said, March started very strong. We started to see the decline more towards the end of the month.
Also, I think it's important to mention, if you look at our first quarter, I think we have started this year in a very strong manner with the sales increase and the profit increase that we've seen. Unfortunately, the COVID-19 is changing everything, that was supposed to be a very strong year for Richelieu.
Okay. Richard, are you seeing your retailers' sales, how are those holding up? From what we're seeing, it seems like the big box stores are actually performing a bit better than the rest of the market.
Yeah, good question. We see a decrease of our sale by about 40% there as well, but we think that that 40% should remain stable. Not only it's stable, also the accounts receivable from those accounts is really very safe. Basically, what we see I think is probably the worst, I think the bottom of the barrel regarding the sales to other retailers. Maybe we can see some improvement in the future weeks, depending on the government's decisions.
Okay. Richard, I appreciate the 40% figure. That's helpful. I'm not sure if you're able to parse out maybe how that figure would vary for your residential versus commercial end markets.
What we see actually it's rather stable in all the markets that are touched. We have many customers that also are still working because they are there for the essential services. Our customers, they repair roofing, they repair hospitals, they repair places that have emergency needs. You see a lot of product being sold actually for the protection of the employees in the grocery stores and the hardware store and everywhere. We basically sell those products. At Richelieu, we sell a lot of product that are Antibacterial products.
Antibacterial
that are very popular, actually. It's not big sales, but it does create some sales, and many of our customers are working on that type of projects.
Richard, if the 40%, if we assume that that's largely a volume figure, are you expecting that we'll see some product pricing deflation that could add to that, or have you seen any signs of product pricing coming off?
We don't see that actually. I think it's also important to mention, we don't see any price decrease in view, and we see also that our inventory actually is healthy at Richelieu because we usually place the first quarter of the year, it is a low quarter in terms of sales, so we always prepare the procurements to make sure that we have the inventory for the second quarter. All the product needed that were forecasted for the second quarter are already in place, are on the ocean coming. Basically, having the inventory I think is important. What's going to happen after that thing lasts more than two months, we don't know. So far, I think it's important to be secure with good inventory.
Okay. Antoine, I was just wondering if you could comment on how you're managing your receivables right now and any data points you might have there.
Yeah. Basically, we're managing the receivable account per account. It's clear with our credit officers that we're not taking additional risk with credit limits. We are involved on a daily basis, and we make sure that we monitor the accounts receivable on a region-by-region basis. So far we did not see any deterioration in terms of our day sales outstanding. We're looking at it on a daily basis, as I said. So far so good, but obviously this is definitely a risk that we are taking very seriously and monitoring.
Great. That's all I have for now. I'll get back in the queue. Thanks.
Okay.
Thank you. The next question will be from Zachary Evershed at National Bank. Please go ahead.
Thank you very much. Congrats on the quarter.
Thanks.
A lot of the major questions have been asked already, but, given the end market uncertainty introduced by the pandemic, what are your CapEx plans for the rest of the year?
Before the pandemic, it would have been between CAD 10 million and CAD 12 million. Obviously with everything that happens, the maintenance still needs to occur, but we're going to review any CapEx demand. Difficult to answer what it will be, Zach, but for sure it's going to be lower than CAD 10 million-CAD 12 million.
Understood. With CapEx trend and the dividend suspended for now, should we expect M&A activity to also be paused?
Yeah. M&A activity will always be part of our strategy, so we're always on the hunt.
Understood.
We should not miss a good deal.
I should think that due diligence on the ground might be a little bit difficult at the moment, though.
You're exactly right. We are on the hunt, but closing a due deal as of today would be obviously very difficult. The current environment will probably bring us some more opportunities in the future as well. We'll see.
Perfect. Then moving on to the hours and salary reductions. What degree are we looking at there in terms of hour reductions and then the cut to salaries?
I can say that over 50% of our employees have been touched by either temporarily off, part-time on reduced remuneration. Basically, I think we've done what has to be done. Unfortunately, these are not very funny moves to make, but we did not have too much choice. I think the next step also is to analyze carefully the opportunity that the government support programs can bring to us. I think Antoine and his team will be working on that next week and see what we can get from that, because retaining our talents is very important. Any company works well because of its team and its good employees.
Basically, we pay attention to that, and we pay attention to our people, and we're going to see the best that we can do to retain and to make sure that when the business come back, all our talents are also back with us and happy at the same time. We follow up that very closely. Actually, we have a cash proposition, which is positive, and we will try to maintain that and do our best to, again, I repeat myself, to retain our talents for the long term.
Thank you very much. One last one for me. You spoke a little bit to inventory and the supply chain, and the six weeks on water. Looking at the longer term, if we do see a longer duration shutdown, what kind of actions can you take to deal with international interruptions?
We can cancel some orders. We can change our forecast, actually. The inventory that is coming will come. That's it. Before we reorder, we have to make sure that we adjust our forecast according to how they will release the various activities that will take place. Basically, I think the best interest of our government when they made some changes, is to make sure that the small contractors and manufacturers of cabinets or whatever, are going to be back to life. Actually, they are needed in the society. If you look in Canada and the U.S., 80% of our customers are small manufacturers. These guys, they need to have some work and they need to survive, and they need to move forward. Hopefully, the government programs will contribute for them for a better start.
That's very helpful. Just one for Antoine. We're seeing what looks to be a CAD 3.6 million lift to EBITDA from the implementation of IFRS 16. Would you say that that's accurate, and do you think that the level will stay fairly steady for Q2?
Yeah, actually, the impact on the EBITDA is in the amortization and also in the interest. The total impact is CAD 4.3 million. If you compare Q1 this year versus with or before IFRS 16, the impact is CAD 228,000. The estimated total impact for 2020 of the IFRS 16 implementation is approximately CAD 1 million on the bottom line.
Thank you very much. I'll leave it there.
Thank you. Once again, ladies and gentlemen, we are taking questions from analysts. If you do have a question, please press star followed by one on your touch-tone phone. Your next question will be from John Macek at CC&L. Please go ahead, John.
Richard, is there any risk that you now have over-ordered with respect to inventories given the sales trends you mentioned over the last week?
Even though if that would be the case, that would not be a big problem. Actually, the only things we need is more space to stock those products that will be in excess of our needs. I don't see that as a problem, because the product that we sell across North America that are needed for the customer, I don't think we have reached the end of the world. The business will come back in one way or the other. The inventory might cost some money to us, but it's low cost. Warehousing products temporarily does not cost a fortune. I think it's safe to have that inventory. The situation, though, will be to look after. If that thing lasts forever, we all have a big problem here. I don't see that as a big problem.
That could be a few million dollars, let's say CAD 5 million to CAD 10 million excess of inventory, Antoine. I don't think that could hurt us a lot in terms of cash flows. Regarding the warehousing cost, that doesn't cost a fortune. The inventory that is ordered is good inventory. These are good products that are needed by all our products in North America. Don't forget that if we have a problem, our competitors also have a problem if they don't have enough inventory before. It's important for us to have the good inventory.
Any concern that the inventory itself may be overpriced? We're seeing deflationary pressures both in resins and in various metals. I just wondered if you thought there could be a potential impact on margins going forward if we see these deflationary pressures on the raw materials continue.
Yes, you're right. We could be impacted by that. By how much, I don't know. Again, all the industry have the same problem. I guess the next order that we're going to place for the future quarters will be at a lower price. Yes, temporarily our margin could be affected by product that we have paid at the right price at the time that we bought it, but that if we reorder now the same product, it will be at a lower price. Yes, that's a risk. What is the impact exactly in dollars? I don't know. That has a certain impact, yes.
I know you deal with a vast array of customers from very large to very small. Any concern in terms of bad debt, particularly with your small and medium-sized private customers?
Yes, I think we all have that concern. I think Antoine and Steve monitor that very closely. First of all, we could say that 15%-20% of our sales are for the retailer. That's rather safe. We still have a lot of customers that are still active. Basically, they make good money, and they pay their bills well. The other customers that we have are very small. I will let Antoine complete how he sees that, but the small customers, taken individually, are not big risk. Overall, though, yes, that could represent additional bad debts. We don't know. We're very conservative. Antoine, I will let you complete that because you have all the numbers in mind.
Yeah, we're conservative on the bad debt, on the provision, certainly. Like I said earlier, we monitor the account receivable on a daily basis. We make sure that we do not increase the risk on credit limits. We encourage the payment by credit card. There are many things that we're doing, and we're monitoring with our credit team. As of today, as we speak, we haven't seen a deterioration of the credit. As we speak, but if there is, there will probably be one. It's going to be in the next month or so.
If I may complete with the product range that we sell, actually our customers, if they have some business or they come back in business, I think it's good for them to pay additional dues because they need our products. In order to have additional product, they would have to pay their bill. That does help. This is what we've seen in the past, and that should be the case again. I think it's a good move for a customer to pay their dues in order to have the inventory that they will need to continue their business.
Thank you very much. [Non-English content] .
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Thank you. Ladies and gentlemen, as a reminder, if you do have a question at this time, please press star followed by one on your touchtone phone. Currently, Mr. Lord, we have no other questions. Please proceed.
If there's no more question, thanks again. It's always a pleasure to talk to you. Thank you very much for all your good questions, and wish you good health. Stay safe until we have our next meeting for the next quarter. Thank you very much. If you need to call us, we're there. Thank you.
Thank you, Mr. Lord. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your line. Enjoy the rest of your day.