Good afternoon, ladies and gentlemen, welcome to Richelieu Hardware fourth 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. If at any time during this call you require immediate assistance, please press star zero for the operator. Note that this call is being recorded on Thursday, January 23rd, 2020.
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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 30th, 2019. With me is Antoine Auclair, Chief Financial Officer. 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. The fourth quarter benefited from the impact of our acquisitions completed in Canada during the year. These new acquisitions have a good potential, and they expand our reach in some specialized markets. Combined with our market development and innovation strategies, they contributed to generate sales growth of 2.4%, which is welcome given the slowdown, especially in Western Canada, and the challenges we were facing with the hardware retailers. These acquisitions contributed well to our performance in the manufacturer's market.
In the retailer's market, sales were down due to the condition we explained in previous quarter, mainly store closure and inventory alignments of some of our retailing customers. Cyclical sales were also lower in the fourth quarter. It has to be noted that our EBITDA margin continued to improve during the period, reaching 11.8%, thanks to rigorous control of gross margin, operating, and freight costs. EBITDA for the quarter increased by 6.8% and net earnings by 5.6%. I'll now ask Antoine to go through the financial highlights on the fourth quarter and fiscal 2019, and I will come back with additional comments. Antoine.
Thanks, Richard. Fourth quarter sales reached CAD 265 million, up by 2.4%. Sales to manufacturers stood at CAD 233.5 million, up by 4%, 0.6% from internal growth and 3.4% from acquisition. In the hardware retailers and renovation superstore market, we achieved sales of CAD 31.5 million, down by 8.2%. In Canada, sales amounted to CAD 179 million, an increase of CAD 4.1 million. Our sales to manufacturers reached CAD 150.4 million, up by 4%. As for the hardware retailers and renovation superstores market, sales stood at CAD 28.6 million, down by 5.6%. The general slowdown felt in this market during the first quarters of fiscal 2019 continued to have a downward effect on sales in the fourth quarter. In the U.S., sales totaled $65.65 million, up by 1.4%, resulting from internal growth. Sales to manufacturers reached $62.8 million, up by 2.8%.
In the hardware retailers and renovation superstore market, sales were down 26.7% for the quarter, mainly caused by lower cyclical sales, but are up 4.8% for fiscal 2019. Total sales in the U.S. reached CAD 86 million, an increase of 2.5%, representing 32.4% of our total sales. Total sales in 2019 reached CAD 1 billion, CAD 42 million, up by 3.7%, 0.1% from internal growth and 3.6% from acquisitions. Sales to manufacturers reached CAD 898 million, up by 5.5%, 1.2% from internal growth and 4.3% from acquisitions. Sales to hardware retailers and renovation superstores stood at CAD 143.8 million, down by 6.1%. In Canada, sales totaled CAD 685.7 million, up by 1.1%, of which 3.2% from acquisition and 2.1% from internal decrease. Our sales to manufacturers amounted to CAD 568 million, up by 3.4%, of which 3.9% resulting from acquisition and 0.5% from internal decrease.
Sales to hardware retailers and renovation superstores were CAD 129 million, down by 8.8%. The slowdown in this market, mainly in the first half, as well as the closure of several stores of major customers, impacted sales downwards. In the U.S., sales amounted to $267.8 million, up by 6%, 1.6% from internal growth and 4.4% from acquisitions. They reached CAD 356 million, up by 9.2%, accounting for 34% of our total sales. Sales to manufacturers reached $248.1 million, an increase of 6.1%, of which 4.7% from acquisition and 1.4% from internal growth. As reported in previous quarters, the internal growth in the manufacturer's market was affected in the first quarter by the termination of a supply agreement with a major customer. At comparable sales level, internal growth in this market would have been 3.2%.
Sales in the hardware retailers' and renovation superstores markets were up 4.8% in U.S. dollars. Fourth quarter EBITDA stood at CAD 31.2 million, compared with CAD 29.2 million last year. The EBITDA margin stood at 11.8%, compared with 11.3% for the fourth quarter of 2018, resulting from improvement in gross margin and operating costs. For the year, EBITDA was CAD 109.5 million, up by 3.3%. Gross margin and EBITDA margin remained stable with 2018. Fourth quarter net earnings attributable to shareholders totaled CAD 19.5 million, compared with CAD 18.5 million last year. Net earnings per share reached CAD 0.34 basic and diluted, compared with CAD 0.32 for the same quarter last year, an increase of 6.3%. For the year, net earnings attributable to shareholders reached CAD 67.5 million. Net earnings per share were CAD 1.18 diluted, up by 0.9%.
Fourth quarter cash flows from operating activities before net change in non-cash working capital balances were up by 6.9% to CAD 24.8 million, or CAD 0.43 per share. Net change in non-cash working capital balances represented a cash inflow of CAD 7.9 million. For the year, they were up 2.3%, totaling CAD 86 million, or CAD 1.50 per share. Net change in non-cash working capital balance represented a cash inflow of CAD 2.4 million, while CAD 41.5 million of cash flow was used in 2018.
During the year, we paid dividends of CAD 14.4 million, of which CAD 3.6 million were in the fourth quarter, and repurchased common share for CAD 25.2 million. We have thus distributed a total of CAD 39.6 million to our shareholders this year. We also invested CAD 31.3 million during the year, of which CAD 20.8 million was for business acquisitions, and CAD 10.6 million for equipment to maintain and improve operational efficiency and for IT equipment.
As at November 30th, 2019, cash totaled CAD 24.7 million, and our working capital was CAD 250 million for a current ratio of 4.7:1. I'll now turn it over to Richard.
Thank you, Antoine. 2019 was a very active year. We continued our efforts to expand and develop markets, which included strengthening our presence in specialized markets through our recent acquisitions, such as Window and Exterior Door Hardware, Architectural Hardware for stair and railing, including stainless steel and glass. Under our innovation strategy, we continue to broaden and diversify our product offerings to stay ahead of trends. In early December, we opened a new Distribution Center in Mount Laurel, a suburb of Philadelphia. This new center houses a wide range of premium Decorative Panels for this region. The implementation of our new center in New York is well underway. We anticipate that the official opening of the showroom will hopefully take place before the end of the second quarter.
This key location with a state-of-the-art showroom for our customers and the New York community of architects and designers is designed to serve as a friendly workspace where they can obtain detailed and complete information about Richelieu's products and services. We continue to improve our operational efficiency and customer service. We manage our supply chain, taking advantage of the best practices and technologies in order to minimize costs and maximize customer satisfaction. Our highly effective and reliable AutoStore system is now expanding. We further invest in the richelieu.com, which is used extensively by our customers in both Canada and the U.S. Our online sales are growing and now reach about 39% of our sales in Canada and 28% in the U.S. We are pleased to have started fiscal 2020 with two new acquisitions.
On December 9, 2019, we acquired Decotec, a distributor of Decorative Panels and related products with a Distribution Center in the Toronto suburb of North York. Mibro, a distributor of hardware products and Power Tool Accessories for the retailers market. Mibro has been the leader in its field for over 65 years and serves a wide range of customers in Canada and in the U.S. from two Distribution Centers located in Toronto and Buffalo. The integration of Mibro enables us to broaden our offer to hardware retailers both in Canada and in the U.S., where their annual sales are approximately $15 million. This also reinforces our sales force and product management team in this market. We already started our integration process and will take necessary action in order to gradually improve the profitability and take it to an acceptable level as per Richelieu standards.
Combined with the four acquisitions completed in fiscal 2019, we add approximately CAD 17 million in annual sales. We also recently signed an agreement in principle to acquire a U.S. distributor operating in new strategic regions for Richelieu. This transaction should generate additional sales of approximately $15 million on an annual basis. Our strong network now includes 80 centers, 43 in Canada and 37 in the U.S. In 2020, we will remain focused on innovation, outstanding customer service, market share gain in Canada and in the U.S., new synergies, operational efficiency and profitability, and new acquisition opportunity. The result would be to continue to create long-term value for Richelieu and its shareholder. Thanks, everyone. We'll now be happy to answer your questions.
Thank you. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received from analysts only. Should you wish to withdraw your question, simply press star followed by two. We do ask that if you're using a speakerphone, to please lift the handset first before pressing any keys. Your first question will be from Hamir Patel at CIBC. Please go ahead.
Hi, good afternoon.
Hi.
Richard, could you for the acquisitions that are expected to close in Q1 that you've already announced, the CAD 40 million that has closed and that the sort of $15 million of sales under the agreement, what's the purchase price associated with those three transactions?
It's around CAD 23 million, Hamir.
Okay, great.
The two acquisition closed in December.
Okay. What about the one in principle? Is there a figure for that one yet?
It's too early for to talk about that.
Okay. Fair enough. Richard, you referenced for the one under the agreement in principle that it's going to expand Richelieu into a new strategic region. Any more color you can give on which part of the U.S. or North America that expansion's going to take place?
I think this is according to our strategy in the U.S. to continue to our market penetration, to get new DCs in new regions where we can expand our product offering and increase our sales and create more value for Richelieu in the long term as well by expanding our network in this country. That should continue on for the months to come as well with the same strategy.
Right. Okay. Is that the sort of U.S. South, U.S. West? Anything can-
It's hard to tell because it's a very small market. If I tell where it is, the competitors since this is very confidential, that would be easy for people to guess who we're talking about in the U.S. market.
Okay. Fair enough.
Yeah. Sorry about that.
That's okay. Final one for me for now. The retailer market for Canada and the U.S., when would you expect each region to get back to positive comps?
We don't think for the next two quarters, this market to be positive for Richelieu, both in Canada and the U.S. With the acquisition of Mibro, we are not only expanding, I think we're gonna almost double up our sales to the hardware retailers in the U.S. A new sales team is joining us that is very active in the U.S. as well as in Canada. We expect, in the months to come, some very good synergies in terms of increasing our sales in both countries using the sales forces that we both have and combining the best that we can. Basically, we are happy about that acquisition for the good value it does represent for Richelieu for the midterm and the long term.
Great. Thanks. That's all I have for now. I'll get back in the queue.
Good.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. Your next question will be from Zach Shine at National Bank. Please go ahead.
Good afternoon. Congrats on the quarter.
Thank you.
Especially the margin improvement YoY, that's three straight quarters now. Can you tell us a little bit about which initiatives are helping out with improving gross margins and reducing operational costs?
Actually, we have a tight control over the gross margin, so it's always been tight, but this year we've paid special attention to the timing of the price revision when they have to be revised. Regarding the expenses, before acquisition, we have decreased very slightly our operating expenses in North America. Regarding the freight cost, as I have mentioned last year and a few times during the course of last year as well, that we have established some tight control, and not only we have stabilized, but as a percentage of our sale, we have slightly decreased the cost of the freight, and we continue to work on that. I think the cost of the freight is a major issue for all companies in the world. Basically, that does remain a very important item for us to keep an eye on. We're happy with the end result.
That is an increase in the margin.
That's great color. Thank you. Do you think 12% EBITDA margins are achievable over the next couple of years, given your current infrastructure and geographic network?
Everything could be achievable, but if we look at the long term, we have to make sure that we remain reasonable with our pricing, that our marketing strategy is sound with what we've done and what our customer expected. Believe us, it's a top priority for Richelieu to maintain our margin, and I cannot commit it well, but we have that in mind, too.
Beautiful. Thank you. Then moving on to organic growth, still quite weak there, and that's lapping a soft Q4 last year. You mentioned that retailer sales won't hit positive comps for maybe two quarters, but what can you tell us about your view on internal growth in 2020 for the company as a whole?
It's hard to tell. I think we have an aggressive plan at Richelieu. We expect to have a reasonable growth. I cannot commit on any number, but that's our goal. Regarding the hardware retailers, basically that's something which is out of our control. You know that one of our big customers is closing 34 more stores. They actually are doing that at this time. It does create some sales decrease for a while in the retailer market. In the long term, it does not change anything for us because we sell to all the customers in Canada, so sales should go somewhere else. For the time being, this big customer doesn't buy and Richelieu has all the inventory in other stores, so that affects the market.
I was reading in the paper this morning that Mr. Poloz was talking yesterday or the day before to the market, I think now they realize that it's all over Canada, the retail sales are difficult since a few months. This is what we see with our customers. We've seen that mainly for the first two quarters of the last year the last two quarters were a little bit better, It's not what we're used to seeing. Anyways, we just hope that things will improve over the months. For the next two quarters, we don't expect anything positive for the retailers. Regarding the manufacturers, we see now that Western Canada is getting worse. This is what we see in the last month and the month before.
Quebec should remain stable as well as Ontario. Western Canada is going to affect our sales in total. That would take, I think, an important decrease of the sales. We're talking here about maybe 10% decrease, something like that. Even though they do not represent a high percentage of our sales, at the end, it does have an impact. That's something that we live with. In the U.S., we expect to have a good year. We have a good start in the U.S. for the beginning of this new year, and we expect to have a decent growth for the whole year for the manufacturer. For the retailers, the forecast is a little bit more difficult. It's going to be very positive because of Mibro. For the rest of the market, I think the basic market that we have will be positive.
The cyclical sales with the store that we're talking about here, we never know from one quarter to the other what's going to happen.
That's extremely helpful. Thank you. Just one last point for me, the acquisitions. Very busy with Decotec and Mibro. How long have you been working on those ones?
Mibro, that's something that has been open about 10 years ago here. We have opened and closed the file for a couple of times before finally we've got a deal. We think it's a very interesting fit for Richelieu. We're happy that it's done now. Decotec has been very quick. I think it took a month, a month and a half.
Yeah.
Oh, wow. Okay. How's the pipeline looking going forward? Do you have anything maybe the size of another Mibro or maybe a Weston that you're looking to get across the finish line?
No, there's the one in the U.S. The pipeline is still healthy in Canada and also in the U.S. We're talking about pretty much the same kind of profile of company that we've acquired. We have nice things in front of us.
That's great. Thank you. I'll turn it over.
Thank you. As a reminder, ladies and gentlemen, if you do have a question, please press star followed by one. Next question is a follow-up from Hamir Patel. Please go ahead.
Thanks. Richard, you referenced Western Canada manufacturer sales could be down, I think you said 10% in 2020. What percent of your manufacturer sales is Western Canada again?
What? 6% or 7% of our sales, Antoine?
Yeah, it's slightly higher than that. It's around 10%.
For the sales manufacturers.
Sales manufacturers.
Okay. Yeah.
Okay, great. No, that's helpful. Richard, you also referenced, I think some sort of the AutoStore continuing to expand. How do we think about CapEx for 2020?
CapEx will be similar to 2019, Hamir, so between CAD 10 million and CAD 11 million.
The AutoStore deal.
Great.
New investment is not very high because while they have made all the software that was necessary to establish an AutoStore here. Really what we have to do is we need to get the space and build the module that has to be built in order to install the expansion. We don't have any software expenses and whatever, many IT people involved with that type of thing. That should be an easy one.
Yeah.
Great. Thanks. Antoine, I know we're probably not going to get the MD&A for a few weeks, but how do we think about Q1 will be your first quarter under IFRS 16? What sort of EBITDA impact and lease liabilities should we be factoring in?
We're going to be finalizing the Q1 impact, but we're talking about close to CAD 70 million of addition on the asset side and our liability as well. In terms of potential impact on the bottom line, for 2019, it's around CAD 1 million lower profits for 2019. We'll see for Q1 and 2020, but that's the impact on 2019.
Sorry, the EBITDA impact for-
Okay, the EBITDA impact, it's around CAD 15 million.
CAD 15 million. Okay.
Yeah, CAD 15 million increase in EBITDA and an impact on the amortization and interest.
Okay, great. That's all I had. I'll turn it over. Thanks.
Thank you. At this time, Richard Lord, we have no other questions, so I would like to turn the call back over to you, sir.
Thank you very much, everyone. We'll be happy to receive your phone call if you have any further questions. Thank you very much. Have a good afternoon.
Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.