Good afternoon, ladies and gentlemen, and welcome to Vishalu Hardware First 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 recorded on Thursday, 04/04/2019.
Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the first quarter ended February 2839. With me is Antoine Leclerc, 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. The first quarter is generally our weakest period in terms of financial results. But this year, we have made a very good start in terms of business acquisition.
During the first quarter, we closed three new acquisitions in Canada, Lion Industries, Blackstone Building Products and Trueform Building Products. These three specialty hardware distributors serve a customer base of window and door manufacturers in Ontario and Western Canada from their three centers located in Calgary and Concord. They give us the opportunity to increase our business in the window and door manufacturers segment, reinforce our current presence in these markets while adding $12,000,000 in sales. Now let's look at financial highlights. During the first quarter, our results were affected by lower sales to hardware retailers including renovation superstores in Canada and in The U.
S. First quarter sales reached $226,000,000 up by 2% of which 2.8% from acquisitions. Sales to manufacturers stood at $192,300,000 up by 5.3%, 1.9% from internal growth and 3.4% from acquisitions. In the hardware retailers and renovation superstores market, sales stood at $33,900,000 down by $5,200,000 or 13.5%. In Canada, sales amounted to $143,700,000 stable with 2018.
Our sales to manufacturers reached $11,700,700,000.0 up by 4%. As for the hardware retailers and innovation superstores market, sales stood at $26,000,000 down 15.9%. This is due to the fact that in the 2018, our sales in Canada were exceptionally high in this market for the first quarter. In contrast, during our 2019, our sales were impacted by the inventory realignment of our retailing customers in what seems to be a softer market. In addition, one of our major customers is in the process of closing some stores.
So far they have closed 25 stores. I would like to point out that we did not lose any market share or any listing with our other retailers customers. In The U. S, sales totaled $62,000,000 a slight increase compared with twenty eighteen. They reached $82,500,000 in Canadian dollars, an increase of 6% and represented 36.5% of total sales.
Sales manufacturers reached US56.1 million compared with US55.4 million dollars an increase of 1.3%, of which 7.4 from acquisition and an internal decrease of 6.1% resulting from the end of a supply agreement with the major customers as reported in previous quarters. Note that at comparable sales, internal growth in The U. S. Manufacturers market would have been 3%. In the hardware retailers and innovation superstore market, sales were down 9.2% in U.
S. Dollars. This decrease is due to the temporary effect of significant cyclical sales made to our major customers in the 2018. Excluding this factor, the hardware retailers the hardware sales growth in The U. S.
Would have been 50% due to additional market development. Given the cyclical nature of these sales, we are confident to recoup these sales in the coming quarters. First quarter EBITDA reached $17,400,000 down 2,400,000.0 Gross margin remained stable compared with the same period of last year. The EBITDA margin stood at 7.7% compared to 8.9%. It was affected by the slowdown in sales to the hardware retailers market during the quarter, the market development cost to increase our offering and our presence in the retailers market in The U.
S, including the additional costs incurred as a result of the temporary increase of our inventory and the effect of our recent acquisitions. Amortization expenses for the 2019 was $400,000 resulting from investment made in capital assets in 2018. First quarter net earnings attributable to shareholders totaled $10,100,000 and diluted net earnings per share was $0.18 compared with $0.22 last year. First quarter cash flows from operating activities before net change in working capital balances amounted to $13,900,000 or $0.24 per share, a decrease of 13%. During the first three months, we paid dividends of $3,600,000 up 4.4% over 2018.
We also invested $6,600,000 of which $4,800,000 for business acquisition and 1,800,000.0 to purchase new equipment in order to improve operational efficiency. As at February 2839, Pancraf amounted to $16,400,000 compared with cash of $7,400,000 as of November 3038. This change mainly arise from the increased inventory resulting from the following main factors. The slowdown in sales to hardware retailers during the quarter for which we usually keep more inventory in order to maintain close to a 100% service level. A normal increase in view of next periods that are historically the most active and pursuing our continuous innovation strategy, adding new products in order to develop new business opportunities.
The corporation posted a working capital of $333,500,000 for a current ratio of 4.2:one. To conclude, in the coming periods, we will continue to seize and create opportunities, building on our key strengths and strong financial position, implementing our innovation and market development strategies and closing new strategic acquisition in North America. We are confident to produce positive results in the next quarter. That concludes my overview. Thank you for your interest and now I'll be happy to answer your questions.
Thank And your first question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Good afternoon. Good afternoon.
So a couple of quick ones just off the bat.
I was wondering if you could
break down U. S. Organic growth and acquisition growth in U. S. Dollars?
Yes, we have this information over here.
U. Internal growth is basically minus 6% from internal it's a decrease. Acquisition is 6.6% growth. And basically, the reason for the internal decrease is twofold. The cyclical sales on the retailers' market and also the loss of this of the one customer that we've mentioning since the last four quarters.
So excluding the effect of this one customer in the industrial side, so the internal decrease is 6%, but excluding that effect, it's a growth of 3% on the industrial side. And on the retail side, excluding the impact of the cyclical sales for one customer, it's growth of 50% instead of a decrease of 9%.
That's great. Thank you.
Another quick one. Will capital expenditure in 2019 be consistent with the levels we saw in 2018 and 2017?
No, you should see a bit
of reduction because in 2017 and 2018, remember that we've invested a lot of money for our auto store system here in Saint Laurent. So the maintenance CapEx should be around the $10,000,000 mark.
Thank you. Next one, going more in-depth on your gross margins and operating margins. We talked about market development cost to increase the presence in The U. S, temporary increases in inventory. Going forward, do you see pressures on the business or any kind of structural or cyclical shift that will result in lower margins?
In essence, do you view RCH as a 10% EBITDA margin business?
What we see is that our margins will be back to normal considering the decrease in the sales to hardware retailers actually that does affect the bottom line directly because we have to keep up with the same expenses, plus the fact that as a result of those customers that are not buying, so our inventory has to be full 100% all the time because we're expecting those sales. And most of the product that we sell to that market segment comes from Asia. So could not stop the container. So that does increase the inventory resulting also in further expenses because our warehouses are full, so we have to go for outside warehousing and a few other things like that. That costs some dollars.
Did I forget something, Alfonso basically, things should be back to normal as soon as the sales are back to normal.
And so if end markets don't pick up and we see a bit of a structural slowdown, will you continue to have the drag from higher inventories?
How long does it take
to turn down that tap?
Yes. Actually, we tried to close the tap right now, if it's possible, and we will eventually if the sales are not back. But I would be surprised if the market comes back to a normal level with the hardware retailers. Usually, this market is pretty stable. Do it yourself market has been always strong in Canada and should continue to be strong this year.
I don't know where I cannot explain all the reason why the point of sales for them seems to be lower than last year. Is it a matter of season? Is it a matter of something else? We don't know. But basically, usually this market is rather stable, it should be back.
Regarding the cyclical sales, we expect we already have the order in hand to confirm that we will sell at least as much as we did sell last year. So we don't see any problem there too. So that should be fine if the sales improve. If not, as you mentioned, there's no doubt we're going to close the tap.
Understood, understood. And last year, we were looking at somewhere around a $40,000,000 run rate per quarter for sales to retailers. In the last two quarters, it's been closer to $34,000,000 with the impacts that we've described. How good is your visibility on the next quarter? Which way do you think it will lean to the 34,000,000
or the $40,000,000
It's hard to answer to that. Think the $40,000,000 seems to be a reasonable number.
Yes, the first quarter, Zach, is always the weakest quarter as well. So the spring season is always busier season for the retailers. So hopefully, this will come back to a more normal level.
That's very helpful. Thank you. And just one last one for me. If we could get additional color on your end markets and the geographic performance in Canada?
Yes. The geographic is interesting. Industrial sales in Canada East is up by 4.6%. Western Canada is up by 3.6%, and Ontario is up by 1.3%. Ontario seems to be weakening a little bit for the time being.
And on your various end markets, kitchen cabinets, that kind of thing?
Kitchen cabinets are up by over 2.5%. And we have the residential and office furniture market, which is up by 10%. And we have other market where that I will explain the the the other market, which is up also by by 10%. That other market, what we call our door market actually we should maybe classify our information a little bit better, but that consists of the window and door manufacturers, the glass customers and the other distributor that we sell to.
So the three new acquisitions will be falling under the other category?
The window and door.
Beautiful. I'll turn it over. Thank you.
Okay. Thank
you. Next question will be from John Novak at CCL. Please go ahead.
My question was answered on
the last one. Thank you. Good.
Thank you. Next question will be from Robert Curry at Lewisburg Investment. Please go ahead.
Hi. Can you guys hear
me? Hi.
Perfect. Just a couple of questions on margins here. I've kind of been expecting margins to start to tick a little bit better. It seems like it's moving in the opposite direction. Can you guys just give me clarity on when you guys have talked about before, I think 11% to 11.5% kind of normalized margins.
Are you still expecting that? You just mentioned before that you are expecting things to normalize. But can you just give me some color on how that's going to happen and the operating leverage in the business?
What's important to understand is what's going to be happening with the retailer market. That's one thing. And the other thing that impacts our margin in percentage is basically our acquisition. So we've made some good acquisition last year. We're continuing to invest in acquisition.
But of course, for some acquisition, mainly in The U. S, the level of EBITDA is not at the same level as the one that we have with Fisher Year. So we're going to be working and improving those acquisitions. The value is there, the long term value, that's really what we are looking at. So depending of the streak of acquisition that we're going to be completing, that could have an impact on our margin percent.
But our basic business, Industrial, either in The U. S. And in Canada is in good shape and
the margin are stable or improving. If I could add something to that, actually, we spend more for dollar of sales in The U. S. Because we are trying to capture more and more market share. So and the other side, we invest more in new products.
We have a three our inventory increase consists of something like $20,000,000 as well from new product. It's like making an acquisition. Sometime investing in new products, you increase your inventory, you might temporarily increase your expenses, but the goal is to sell more in the future. That's I think it's good money invested. It's like making an acquisition.
Same thing for the investment that we do in The U. S. We could cut our expenses in The U. S. And have the time for, I would say, short term and EBITDA much closer to what we do in Canada.
But I think for the long term, we have to keep on investing both in sales rep, reps that cover architects and designers and so on and so forth as well as developing the retailer market. It costs some money to develop some market. Personally, I compare that as making an acquisition. You invest money in order to improve your income in the future. And I think this is exactly what we do.
We think about the long term of this company and make sure that we will achieve the goal that we hope to achieve in the future.
Yes, that's helpful for sure. I guess I'm thinking as well just on you guys have talked about before about the kind of investment you made, obviously in the warehousing, but how that's also impacted costs. And my understanding is that you're either lapping those costs now or you will be very soon. Can you just give me quick color on how that's going to shape up?
Actually, regarding the investment that we've made in the world, it really brought the benefit that we were looking for. But if you look at the it's been muted, like I said in the last meeting, by transferring those expenses somewhere else like the changes that we've made into our warehouse in order to organize the area for the auto store created turbulence now that we have to readjust in the rest of the warehouse, plus the fact that the retailers are not processing. We have new products coming in for $20,000,000 So really the that did create expenses, including outside warehousing and more employees in order to cope with that.
Right. So yes, can you give me some color? One of the things you guys don't give adjusted numbers, but if you could just give some color towards what would normalized EBITDA have been this quarter. And I don't know if you guys are comfortable with kind of sharing if there are some puts and takes and what you guys see on more of a run rate basis, but that would be helpful, I think, too.
What we could tell you is that the margins on the industrial market for our basic business are stable in Canada. They are slightly increasing in The U. S, so we're improving in The U. S. Because sales are increasing.
So at EBITDA level, we're gaining EBITDA percentage, that's for sure. What hurts us in the retail market, it's the volume, like Richard said. So we lose the sales, but we don't have any don't have operational costs in there. So I would say that excluding this major variance in top line, the retail margin and excluding also the investment that we're making in the network in The U. S, the margin are not reducing materially, that's for sure.
But it's an investment, so it impacts the bottom line.
Important to mention, our gross margin was slightly higher in the manufacturers market in Canada in the last quarter as well as in The U. S.
Got it. That's helpful. So you guys are mentioning things like, for example, you're using external warehousing and so with that, you're starting to get capacity. You obviously alluded to that being a higher cost pressure on you guys. Is that something that's going to alleviate in the near future?
Does that cover a Sure. Yes. And so when do you see that is that just waiting for those retailers to purchase that inventory that you guys have already bought? Or how does that
It's part of the retailer volume, but also it's moving those new products that we're investing in. So that has an impact. And of course, this the inventory situation is adding cost to our cost structure. So once this is behind us, operational costs should be back to a more normal level.
Yes, that's helpful. If you can help me understand too, just this is probably one of my last questions here, but just trying to understand the comment you guys made adjusting for the more cyclical purchasing in The U. S. Retail that you would have been growing internal growth of about 50%. It just seems
like a dramatic change from what the
number presented. So can you just help me understand the mix there of how that works and what you're really talking about? Like what really is considered what's the mix of cyclical versus non and kind of how I can think about U. S. Business in that way?
Yes. Apart from the cyclical sales actually for the regular sales to the retailing customers in The US, we're developing new products with new customers. We have new products at Lowe's for example that we're installing, we're losing their stores actually. And we have what's the name, the True Value, which we increase our sales because we penetrate the market, one True Value member one by one. Basically, that does create additional sales, but with not the margin that we're looking for because it's the we to incur the cost of getting into their stores and starting obviously as usual.
It's business as usual for Richelieu. It creates nice sales, but it's also matched with more expenses in order to get our products in their stores.
So we're very happy with that because for midterm, it's a fantastic business that we're developing there. And if I can add one thing. The cyclical sales, what's important to understand is it is with one customer. So I can't call it cyclical or seasonal, but basically, one quarter you can receive a large PO for all of their stores. Next quarter, it won't be there.
But what we are expecting is that we didn't get the sale or we had lower sales in this current quarter, but the sales should come in the next few quarters
That because we needs to buy from you. Like they are going to
need to replenish inventory.
So it wasn't this quarter, but it could be next quarter or the quarter
after that. Is that what you mean by We
already have the order on hand to confirm who will sell at least the amount that we sold last year in the whole year.
Okay. That's Yeah. That's what I was gonna get clarity on that too. Yeah. That's helpful.
So then you're seeing quite an investment in working capital this quarter as you've mentioned as well. We're seeing for the first time you guys well, I don't know if I should say it's the first time, but
It's not the it's
not the first time.
No. No. Oh, I was gonna say the first time for, really being net debt, I guess, you could say now with the bank draft. So what's kind of your capacity you guys are willing to lever up to? And do you want let's say, for example, inventory still needs investment, but you see continued acquisitions or your stock price falls another $2.03 dollars Are you guys going to would you consider reinitiating the NCIB and start buying back more stock?
Or just want to get a sense for capital allocation as well.
Yes. We're always on the search for the NCIB, but the priority is acquisition. So we have a lot of leverage on the balance sheet. It's definitely not an issue. Either we invest in acquisition, we invest in working cap.
But priority what you need to understand is priority is acquisition after we have dividend policy and also the share buyback that is in place. And what we could leverage a company we could leverage a company three times the EBITDA, but we won't do that for the we will do that for only for the right reasons. For the right acquisition, we'll do it. We need to look at sustainable EBITDA. That's very important.
We have a lot of rigor in our acquisition process. But we're not against leverage. It's that we didn't find the right opportunity to do it.
That's helpful. So and I'm assuming the right opportunity, you're likely more looking south of the border. But I mean, I'm sure you look at everything, but that's kind of where you'd rather it. Is that an accurate understanding?
We're looking everywhere. We just didn't find it yet.
Okay. Yes, I'll turn it over. Thanks. Thank you.
Thank you. And next question is a follow-up from Zachary Evershed. Please go ahead.
Yes. We've seen a little bit of activity initiatives from superstores in the space targeting the pro market as well as some automated pickup lockers. Have you seen any impact on your market share in The U. S. Or in Canada as a result of this?
Or have you noticed any change in the competitive dynamic?
We have not seen such thing yet. What they do usually, they go after the pro market, but they don't have all the product. They could not service, for example, the cabinet industry, for a few inches and a few basic draw slide. But most of the time, buy products from our customers, which we sell to the consumers and they supply the installation. This is what we see more and more.
The other product business that we see that they are doing usually it's not affecting us for the type of product that we sell. But we have to keep an eye on that. We never know.
That's helpful. Thank you very much.
Thank you.
Thank you. And at this time, Mr. Lau, we have no other questions. So I would like to turn the call back over to you, sir.
Well, thank you very much. It's always a pleasure to talk to you. Have a nice day.
Thank you, sir. 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 day.