Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Second Quarter twenty nineteen 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. Note that this call is being recorded on Thursday, 07/04/2019.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Richard Gere's conference call for the second quarter ended May 3139. With me is Antoine Hautlaire, 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. Richelieu performed very well in the second quarter as shown by increase in sales, EBITDA, net earnings and cash flows compared to the same period of last year.
Our market development, acquisitions and innovation strategies fuel sales growth to U. S. Manufacturers and retailers. It should also be noted that the significant rise in our sales to U. S.
Retailers is partly due to the increase in cyclical sales during the period, which were lower in the first quarter of the year. In Canada, sales growth resulted entirely from our manufacturers' market, with sales to retailers that continue to be affected by a general slowdown in this market. We pursued our acquisition strategy by closing Perro Architectural Components on May 1, which is our fourth acquisition this year. This distributor, based in Toronto and Montreal, is a leading is a leader in the architectural hardware and stainless steel components for the market of the stairs, dynisters and railings, notably for glass, which is a trending market for both residential and commercial projects. Therefore, we are adding specialized products to our offering, new expertise and customers.
Together with prior three acquisitions completed in the first quarter, Vishalu sales will increase by approximately $30,000,000 annually. By integrating these four successful acquisitions, we will focus on sales and operational synergies. Our investment totaled $18,400,000 in the second quarter, including $16,000,000 in business acquisition. We repurchased common share in the normal course of business for $4,500,000 which ended the period with a healthy and solid financial position. Now let's look at financial highlights.
Second quarter sales reached $281,200,000 up by 6.8%, of which 3.2% from internal growth and 3.6% from acquisitions. Sales to manufacturer stood at $38,000,000 up by 7.1%, 2.9% from acquisition and 4.2% from acquisitions. In the hardware retailers and delivery and superstores market, we achieved sales of $43,100,000 up 5.4%. In Canada, sales amounted to $183,000,000 up by 1.3%, entirely from acquisition growth. Our sales to manufacturers reached 151,900,000 up by 2.6%.
As for the hardware retailers and the renovation to personal market, sales stood at $31,100,000 down 4.9%. And eventually, the alignment of our retail customers due retail customer market due to a general slowdown in this market continues to have a downward impact in our sales. It should be noted that leisure years did not lose any market share in this market. In The U. S, sales totaled $73,300,000 an increase of 14.
Sales to manufacturers reached $64,000,000 an increase of 11.2% over the 2018, of which 5.1% resulted from internal growth and 6% from acquisitions. Sales in U. S. Dollar to hardware retailers and innovation superstores were up 39%, mainly attributable to lower cyclical sales in the first quarter of this year. Total sales in The U.
S. Reached $98,200,000 in Canadian dollar, an increase of 18.9% and represented 35% of our total sales. For the 2019, sales totaled $507,400,000 up 4.6%, 1.4% from internal growth and 3.2% from acquisitions. Sales to manufacturers reached $430,500,000 up 6.2, 2.3% from internal growth and 3.9% from acquisitions. Sales to Outdoor Retailers and Innovation Superstores were down 3.9%.
In Canada, sales reached 3 and $26,700,000 up by $1900000.0.0.6 percent, of which 1.7% resulted from acquisitions and an internal decrease of 1.1%. Sales to Manufacturers rose to $269,600,000 up by $8,400,000 or 3.2%, of which 1.1 resulted from internal growth and 2.1% from acquisitions. Sales to our loyal retailers and renovation superstores reached $57,100,000 compared to $63,600,000 down 10.2% over the 2018. In this market, the 2018 was marked by exceptionally high sales. In addition, during the 2019, our sales were impacted by inventory realignment of our other retail launch customers due to a general slowdown in this market.
It should be noted that this year did not lose any market share in this market. In The U. S, sales amounted to $135,300,000 up by 7.2%, 1.2% from internal growth and 6% from acquisition. They reached 188,700,000 up by 12.7%, accounting for 35.6% of our total sales. Sales to manufacturers totaled $120,500,000 an increase of US7.2 million dollars or 6.4% over the 2018, of which 6.7% resulted from acquisition and an internal decrease of 0.3% following the termination of a supply agreement with the major customers as reported in the previous quarters.
Note that at comparable sales level, internal growth in The U. S. Manufacturers market would have been 3.8%. Sales to other retailers and the renovation to first charge were up 14.7% from the corresponding period of 2018. Second quarter EBITDA reached $30,700,000 up by 2,700,000.0 or 9.5% over the 2018.
Gross margin and EBITDA margin improved slightly from the 2018. The EBITDA margin stood at 10.9% compared to 10.7% last year. First half EBITDA was $48,200,000 up 0.6. The gross margin remained stable. As for the EBITDA margin, it stood at 9.5% compared to 9.9% for the 2018.
The EBITDA was impacted by the slowdown in the hardware retailer market in Canada and market development costs incurred in order to increase our product offering and our presence in the retailer market in The U. S. Second quarter net earnings attributable to shareholders totaled $19,300,000 up 6.1%. Net earnings per share were $0.34 basic and diluted, an increase of 9.7%. First half net earnings attributable to shareholders reached $29,400,000 down 4.9%.
Net earnings per share was $0.51 diluted, down 3.8%. Second quarter cash flows from operating activities before net change in working capital balances amounted to $23,700,000 or $0.41 per share, an increase of 6.7%. For the first half, they were down 1.6%, totaling $37,600,000 or $0.65 per share. For the 2019, dividends paid to shareholders amounted to $3,600,000 an increase of 4.2%. We repurchased common shares for $4,500,000 During the first six months, we paid dividends of $7,200,000 up by 4.3%.
We also invested $25,000,000 of which $20,800,000 for business acquisition and 4,300,000.0 primarily for equipment to improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of 342,100,000.0 and a current ratio of four:one. Turning to our outlook. In the next quarters, we will remain focused on market share gain in Canada and in The U. S, new synergies, operational efficiency and profitability and new acquisition opportunity compatible with our growth objective.
We are confident that our strategy of ongoing innovation, market development and acquisition will continue to bring good results in the 2018. That concludes my overview. Thank you for your interest. We'll now be happy to answer your questions.
Thank you, Mr. And your first question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Good morning.
Good morning. Good What are doing, Zachary?
What can you tell us about the quality of the new acquisition and your forays in into stairs, banisters and railings?
Yes. Actually, would say that the first three acquisitions that we've made were in the door and window industry, for the manufacturer of that type of industry. That was some that type of products we were selling to a very, very small extent. Now by making those acquisitions, we grab market share in Canada and those products we believe are totally compatible with what the issue you can understand and do and grow in the future. Regarding Euro Architectural, this is a very interesting company selling stair components, including stainless steel stair components, which is a very trendy market.
Combined with glass, we see that new those new system of stairs in every commercial and in many commercial and many residential project as well. So we think it's a market which is emerging that will be there for a long time because it's high quality, good look products and it brings good margin at the same time because there are not many distributors that could afford to be in that industry that requires some large investment in terms of inventory. So we're very happy with those new acquisitions that we've been working on for many months before we can conclude them.
That's good color. Thank you. And as you're adding more distribution centers and territories that are already covered, do you have any plans to rationalize or close any in the coming quarters?
Yes. In Western Canada, we already started to make some rationalization. In Ontario, Quebec, we don't think we're going to make any move on the short term because the occupiers we don't have the space to accommodate them for the time being. But midterm, that's something that we're going to look at. For the first month and the first year, the purpose is really to make sure that we achieve the result that we are expecting from those acquisitions.
Excellent. So moving on to the inventory question. Last quarter, it was a little heavy due to softer retailer sales. Are you able to quantify the impact that rebalancing your inventory had on Q2 results?
I will let Antoine answer to that. But in spite of the fact that the retailers are not buying much, we had a very good decrease of the inventory in the last quarter, Antoine.
Yes. If you exclude the FX impact and also the impact of the new acquisition, our inventory reduced by slightly more than 10,000,000 during the quarter. But we're still carrying more inventory due to the sale pressure on the retailer side, but we've seen an improvement on the inventory side during the quarter.
Thank you for that. And given that they're not buying much and you're still seeing the pressure there, how do you view your how do you view the likelihood of a recovery in that section? Do have any information on end markets there?
Zachary, I've been in that business for thirty years. I've been I know the I've been working at Wona. So I understand I think this market quite well. What we're seeing today I think I've never seen in thirty years, there is a real slowdown in this market. I think what we've missed in the first February will not come back because people now are doing the sort of gardening.
I don't think they're going to go back in the stores to buy the product that they forget to buy in the spring. But normally, the market should be back to normal somewhere, somehow before the end of the year. But actually, don't have enough information to tell you when that could happen. And we really feel that the market is in severe slowdown. And it seems that the construction as well in Canada and The U.
S. Is not a booming industry for the time being. But we usually, to show you, we always capitalize on the renovation market. And we believe that this market should sustain our sales. But for the retailers, there's not much we can tell more than what we tell you that it seems that these guys actually, they don't sell much.
So then would it be fair to assume that Canadian retailer sales will continue to decline year over year for the rest of 2019?
Hopefully. Thing will get better in the fourth quarter, hopefully. You say fourth quarter? Yes, because we're in the third quarter actually and we don't feel that any comeback in that type of business.
That is good color. Thank you. So as the Canadian market continues to soften and The U. S. Portion of the business grows, would it be fair to assume that you'll see margin pressure in the back half of the year then?
No. We have a tight control on our margin. And I think we control our expenses. We have very tight control on our expenses. I think we have to we have established new control on our freight expenses because we all know that freight is becoming an important factor in distribution because it does affect the margin directly.
As we showed you, in spite of that, I think we have slightly increased our gross margin in the second quarter, and we I think we should be able to maintain that in the next two quarters in spite of the state of the market.
And looking out to 2020 and beyond, do you see margin erosion as you expand The U. S. Offering or further stability?
I think stability.
Perfect. Thank you. And just to close out for me, could I get some additional color on the geographic performance in Canada in the East, West and Ontario?
Yes. Actually, see the East, we still have an increase below 1% in the Eastern Canada. But I think Antoine is something like 5%, 6% increase in Quebec. Quebec is still strong. The maritime and the Atlantic areas are very, very down.
But Quebec is still very good in terms of sales and our customers are very busy in Quebec. Ontario was down for the second quarter by 1.7%, while Western Canada was down by only 0.9%, which is in the circumstances I think we're doing very, very well. I don't think if it is sustainable in the future, but this is what we have we're proud about our achievement in the second quarter. So that gives you a good figure of the geographic market in Canada. Market segment, actually, see kitchen cabinet manufacturer being down by something like 2.5%, like the middle work and commercial renovation being down by 3%.
But we've got something interesting, though. We realized that in other what we call other specialized market here, which is the result that does not include acquisition. We're up by 6%. So that's the market development that was done in the past due to the past acquisition as the new product line that we have introduced. So now we have we will probably have to reclassify those topics to be more specific in the future.
But actually, we call that other specialized market. We're talking about door and window manufacturers, glass hardware customers, closet customers as well as e tailers. So this is and we see an increase there of 6.2%, which is very good. In the Residential Furniture market, we're about flat. But the Office Furniture, we have a nice increase of 7.8%, which is also the result of the strategy that we've talked to you about in the last two years into creating a special thing to sell that type of customers, both residential and office.
So now we see the result. So an increase of 7.8% in the office furniture market. So we're quite happy with that.
Fantastic. Thank you very much for your time. I'll turn it over.
Thank you. And your next question will be from Rob Curry at Lewisburg Investments. Please go ahead.
Hi, how's it going?
Yes, fine. Thank you.
Good, good. I just really wanted some color on what's going on with Canadian manufacturers. We're seeing that steady decline or deceleration continue. Are we going to see that rebound in Q3, Q4? Or is that likely going to stay around zero, possibly turn negative?
I don't think Alberta would be better. I think it could be worse than Alberta. We see BC still very good, should sustain as well as Quebec. So Eastern Canada should continue to be stable. The information that we have from our sales force is that in Eastern Canada, our customers are very busy from here to the end of the year.
And we see Ontario as being maybe close to being flat with a slight increase. What we think here will happen is a slight increase in Ontario for the last two quarters, but that has to be proven yet. But we talked to our sales management people over there. And this is what we hear actually that the customers are getting more and busy because we are quite related with the renovation market and that market usually do well whatever the circumstances are.
That's good color. And just again on margins, if I could. You guys are talking about stable margins. You talked a little bit in the past about continuing to improve margins substantially now that some of the heavy lifting and some of the investments you guys are making are over. Last quarter, we talked about warehousing the inventory in third party warehouses.
Can you give us some color on how margin development in the back half of the year could progress as well?
I think, well, margin our gross margin level, we I think that's going to be stable. And regarding what we call the net gross margin, I think we have to have a tight control. We do have now a tight control. We had a control before, but we have a more tight we have control of those on that type of expenses because the cost of the freight keeps increasing because we use independent carriers to do our business. And actually, we have a good control of that and we usually, we could I think we will control our gross margin.
At the gross margin level, net gross margin level, we're to be online with what we've seen so far. At the EBITDA level, it depends on the sales as a matter of fact. But we again, we have a tight control on our expenses. We keep an eye on our hiring of people and what else aren't well, everything that is anything that is an expense, we make sure that we pay attention to that. And I think we have a pretty good control.
And if the sales are maintained, the margin should be stable.
Yes. No, that's great. The last question I have before I turn it over. Just on the acquisition front, do you guys see can you give us any color on if there's quite a bit more in the pipeline? Know you guys have talked about before.
I think you said something like if the acquisition was right, maybe 2.5x to 3x EBITDA you're willing to lever up to. Are you seeing anything of size, maybe not to that size, but to size at all that could be catching your eye that's worth kind of mentioning?
No. The pipeline is in good shape either in Canada or in The U. S. There's nothing outstanding out there requiring to leverage the balance sheet by two to three times. But really, we have nice file open at the moment.
We're looking at good opportunities, and it's still healthy in both Canada and The U. S.
And you're talking about the specialized Is that going be a continued focus for you guys, building out that?
We always really our purpose is not to sell nails, as we showed you, even though we have nothing against selling nails, it's profitable for us. But our purpose is to sell specialty products. We start where the hardware store stop. So we're to continue. This is why we have added the door and window hardware product line in the course of the last couple of years as well as glass hardware as well as finishing products, product for the closets and the many other products.
And we see as a result of that, that we our sales might be flat in other market segment. But in those two segments, like office furniture and specialty specialized market, we had a nice increase of 67%. So this is very positive. I think the what when we told you at the end of the year last year that we have excess of inventory also because of the new product that we were introducing, now we see the results, we see the increased sales due to those decision to add some product lines to our product offering. And we remain always remain on the specialty products, product that we have to sell to professionals or woodworkers, that type of customer.
Yes, that's useful. Just one last question actually, circling back to the margin. When you say stable, are you referring to stable in regards to these levels that we're seeing this quarter or stable year over year comparable?
What you're seeing this quarter is representative of what would be sustainable, our point of view.
Okay, perfect. Yes, I appreciate that. I'll turn it over. Thank
you. And at this time, Mr. Lal, we have no other questions. So I would like to turn the call back over to you, sir.
There is no more question. We thank you again for attending this call. It's always a pleasure to talk to you. If you need other information, do not hesitate to call us or visit us. Bye bye.
Ladies and gentlemen, this does 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