Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the second quarter ended May 31st, 2019. 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.
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 manufacturer's market, with sales to retailers that continue to be affected by a general slowdown in this market. We pursue the acquisition strategy by closing Euro Architectural Components on May 1st, which is our fourth acquisition this year.
This distributor, based in Toronto and Montreal, is a leader in the architectural hardware and stainless steel components for the market of the stairs, banisters, and railings, notably for glass, which is a trending market for both residential and commercial projects. Therefore, we are adding specialized product to our offering, new expertise, and customers. Together, with prior three acquisitions completed in the first quarter, Richelieu sales will increase by approximately CAD 30 million annually. By integrating these four successful acquisitions, we will focus on sales and operational synergies. Our investment totaled CAD 18.4 million in the second quarter, including CAD 16 million in business acquisitions. We repurchased common share in the normal course of business for CAD 4.5 million, which ended the period with a healthy and solid financial position. Now, let's look at financial highlights.
Second quarter sales reached CAD 281.2 million, up by 6.8%, of which 2.2% from internal growth and 3.6% from acquisitions. Sales to manufacturer stood at CAD 38 million, up by 7.1%, 2.9% from internal growth and 4.2% from acquisitions . In the hardware retailers and renovation superstore market, we achieved sales of CAD 43.1 million, up 5.4%. In Canada, sales amounted to CAD 183 million, up by 1.3%, entirely from acquisition growth. Our sales to manufacturers reached CAD 151.9 million, up by 2.6%. As for the hardware retailers and renovation superstore market, sales stood at CAD 31.1 million, down 4.9%. Eventually, the alignment of our 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 Richelieu did not lose any market share in this market. In the U.S., sales totaled $73.3 million in U.S. dollars, an increase of 14%.
Sales to manufacturers reached $64 million, an increase of 11.2% over the second quarter of 2018, of which 5.1% resulted from internal growth and 6% from acquisitions. Sales in U.S. dollars to hardware retailers and renovation superstores were up 39%, mainly attributable to lower cyclical sales in the first quarter this year. Total sales in the U.S. reached CAD 98.2 million, an increase of 18.9% and represented 35% of our total sales. For the first half of 2019, sales totaled CAD 507.4 million, up 4.6%, 1.4% from internal growth and 3.2% from acquisitions. Sales to manufacturers reached CAD 430.5 million, up 6.2%, 2.3% from internal growth and 3.9% from acquisitions. Sales to hardware retailers and renovation superstores were down 3.9%. In Canada, sales reached CAD 226.7 million, up by CAD 1.9 million, of which 1.7% resulted from acquisitions and an internal decrease of 1.1%.
Sales to manufacturers rose to CAD 269.6 million, up by CAD 8.4 million or 3.2%, of which 1.1% resulted from internal growth and 2.1% from acquisitions. Sales to other retailers and renovation superstores reached CAD 57.1 million compared to CAD 63.6 million, down 10.2% over the first half of 2018. In this market, the first quarter of 2018 was marked by exceptionally high sales. In addition, during the first semester of 2019, our sales were impacted by inventory realignment of our hardware retailers customers due to a general slowdown in this market. It should be noted that Richelieu did not lose any market share in this market. In the U.S., sales amounted to $135.3 million, up by 7.2%, 1.2% from internal growth and 6% from acquisitions. They reached CAD 180.7 million, up by 12.7%, accounting for 35.6% of our total sales.
Sales to manufacturers totaled CAD 120.5 million, an increase of CAD 7.2 million or 6.4% over the first half of 2018, of which 6.7% resulted from acquisitions 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 a comparable sales level internal growth in the U.S. manufacturer's market would have been 3.8%. Sales to other retailers and renovation superstores were up 14.7% from the corresponding period of 2018. Second quarter EBITDA reached CAD 30.7 million, up by CAD 2.7 million or 9.5% over the second quarter of 2018. Gross margin and EBITDA margin improved slightly from the second quarter of 2018. The EBITDA margin stood at 10.9% compared to 10.7% last year. First half EBITDA was CAD 48.2 million, up 0.6%. The gross margin remained stable.
As for the EBITDA margin, it stood at 9.5% compared to 9.9% for the first six months of 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 CAD 19.3 million, up 6.1%. Net earnings per share were CAD 0.34 basic and diluted, an increase of 9.7%. First half net earnings attributable to shareholders reached CAD 29.4 million, down 4.9%. Net earnings per share was CAD 0.51 diluted, down 3.8%. Second quarter cash flows from operating activities before net change in working capital balances amounted to CAD 23.7 million or CAD 0.41 per share, an increase of 6.7%. For the first half, they were down 1.6%, totaling CAD 37.6 million or CAD 0.65 per share.
For the second quarter of 2019, dividends paid to shareholders amounted to CAD 3.6 million, an increase of 4.2%. We repurchased common shares for CAD 4.5 million. During the first six months, we paid dividends of CAD 7.2 million, up by 4.3%. We also invested CAD 25 million, of which CAD 20.8 million for business acquisition and CAD 4.3 primarily for equipment to improve operational efficiency. We continue to benefit from a healthy and solid financial position with a working capital of CAD 242.1 million and a current ratio of 4:1. 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 second half of 2018. That concludes my overview. Thank you for your interest. We'll now be happy to answer your questions.
Thank you, Lord . 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 request, simply press star followed by two. We ask that if you're using a speakerphone, to please lift your handset before pressing any keys. Your first question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Good morning.
Good morning.
Afternoon.
Afternoon, yeah.
What can you tell us about the quality of the new acquisition and your forays into stairs, banisters, and railings?
Yeah. Actually, I would say that the first two acquisitions that we've made were in the door and window industry, for the manufacturer of that type of industry. That type of products we were selling to a very small extent. Now by making those acquisitions, we grab market share in Canada and those products, we believe, are totally compatible with what Richelieu 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 those new system of stairs in many commercial and many residential projects as well.
We think it's a market which is emerging that will be there for a long time because it's a high quality, good look products. 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 term of inventory. 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. 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 occupier, we don't have the space to accommodate them for the time being. 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're expecting from those acquisitions.
Excellent. 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. 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?
Yeah, if you exclude the FX impact and also the impact of the new acquisition, our inventory reduced by slightly more than CAD 10 million during the quarter. We're still carrying more inventory due to the sell pressure on the retailer side. We've seen an improvement on the inventory side during the quarter.
Thank you for that. Given that they're not buying much and you're still seeing the pressure there, how do you view the likelihood of a recovery in that section? Do you have any information on end markets there?
You know, Zachary, I've been in that business for 30 years. I've been working at RONA, so I understand, I think, this market quite well. What we're seeing today, I think I've never seen in 30 years. There is a real slowdown in this market. I think what we've missed in the first two quarters will not come back because people now are doing the 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. Normally, the market should be back to normal somewhere, somehow, before the end of the year. Actually, I don't have enough information to tell you when that could happen.
We really feel that the market is in a 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. We usually reassure you, we always capitalize on the renovation market, and we believe that this market should sustain our sales. 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.
Would it be fair to assume that Canadian retailer sales will continue to decline year-over-year for the rest of 2019?
Hopefully. I think we get better in the fourth quarter, hopefully.
Did you say fourth quarter?
Yeah, because we're in the third quarter, actually, we don't feel any comeback in that type of business.
That is good color. Thank you. 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, I think we control our expenses. We have very tight control on our expenses. I think 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. To reassure you, in spite of that, I think we have slightly increased our gross margin in the second quarter, I think we should be able to maintain that in the next two quarters in spite of the state of the market.
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. Just to close out for me, could I get some additional color on the geographic performance in Canada in the East, West, and Ontario?
Actually, we see the East, we still have an increase below 1% in the Eastern Canada. I think, Antoine, something like 5%-6% increase in Quebec. Quebec is still strong. The Maritime and the Atlantic areas are down. 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 well. I don't think if it is sustainable in the future, but this is what we're proud about our achievement in the second quarter. That gives you a good figure of the geographic market in Canada. By market segment, actually, we see kitchen cabinet manufacturer being down by something like 2.5%, like the millwork and commercial renovation being down by 3%.
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%. That's the market development that was done in the past due to the past acquisition as a new product line that we have introduced. Now we probably have to reclassify those topics to be more specific in the future. 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. We see an increase there of 6.2%, which is very good. In the residential furniture market, we're about flat.
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 team to sell to that type of customers, both residential and office. Now we see the result. An increase of 7.8% in the office furniture market. We're quite happy with that.
Fantastic. Thank you very much for your time. I'll turn it over.
Good.
Thank you. Ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one. Your next question will be from Robert Currie at Louisbourg Investments. Please go ahead.
Hi. How's it going?
Fine. Thank you.
Good. Just really wanted some color on some of Canadian manufacturers. We're seeing that steady decline or deceleration continue. Are we gonna see that rebound in Q3, Q4, or is that likely gonna 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. Western 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. 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. We talk 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.
Yeah, that's good color. 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 of some of the investments you guys have been 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 our gross margin level, I think that's going to be stable. 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 control on that type of expenses because the cost of the freight keeps increasing because we use independent carriers to do our business. Actually, we have a good control of that, usually, I think we will control our gross margin. At the gross margin level, net gross margin level, we're going to be online with what we've seen so far. At the EBITDA level, it depends on the sales as a matter of fact. Again, we have a tight control on our expenses. We keep an eye on our hiring of people and what else, Antoine?
Anything that is an expense, we make sure that we pay attention to that. I think we have a pretty good control. If the sales are maintained, the margin should be stable.
Yeah, no, that's great. Well, last question I had before I turn it over, just on the acquisition front. Can you give us any color on if there's quite a bit more in the pipeline? You guys have talked about before, I think you said something like, if the acquisition was right, maybe two and a half to three times 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 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. Really, we have nice file open at the moment. We're looking at good opportunities, it's still healthy in both Canada and the U.S.
You're talking about the specialized items segment. Is that going to be the continued focus for you guys, building out that?
Our purpose is not to sell nails, as we showed you. We have nothing against selling nails if it's profitable for us. Our purpose is to sell specialty products. We start where the hardware stores stop. We're going 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. We see as a result of that our sales might be flat in other market segments. In those two segments, like office furniture and specialty specialized market, we have nice increase of 6% and 7%. This is very positive.
I think 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 sale due to those decisions to add some product line to our product offering. We will always remain on the specialty products. Product that we have to sell to professionals or with workers, that type of customer.
Yeah, 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 to-
What you see in this quarter is representative of what will be sustainable our point of view.
Okay, perfect. Yeah, I appreciate that. I'll turn it over.
A pleasure.
Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. At this time, Mr. Lord, 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. At this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.