Afternoon, ladies and gentlemen, welcome to Richelieu Hardware second quarter results conference call. At this time, note that 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 operator assistance, please press star zero. Note that the conference is being recorded today, Thursday, July 5th. Thank you. Good afternoon, ladies and gentlemen, welcome to Richelieu's conference call for the second quarter ended May 31st, 2018. With me is Antoine Auclair, CFO. 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.
We have maintained good growth during our second quarter and first half ended May 31st, as we actively pursued our market development strategy and increased the synergies with our latest acquisitions. We are pleased with our sales growth in Canada, where we did very well in our key market segments. In the U.S., our sustained market development efforts, plus the contribution of our acquisition, continue to pay off. Our market share gain during the quarter helped us minimize the impact of the termination of a supply agreement with a major U.S. customer. Thus, we were able to realize an appreciable U.S. sales growth for the quarter and for the first six months. We ended the period with good financial results and a good and strong financial position in order to pursue our growth strategy. Let's look our financial highlights.
Second quarter sales reached CAD 263.4 million, up by 8.3%, of which 4% from internal growth and 4.3% from acquisitions. At comparable U.S. exchange rate to the same quarter of last year, sales growth would have been 9.9%. Sales to manufacturers stood at CAD 222.2 million, up by 7%, 2% from internal growth and 5% from acquisitions. In the hardware retailers and renovation superstore market, we achieved sales of CAD 41.2 million, up by 15.7%. This growth resulted primarily from cyclical sales and the addition of new customers, mainly in the U.S. In Canada, sales amounted to CAD 180.2 million, up by 10%, of which 5.9% from internal growth and 4.1% from acquisitions. Our sales to manufacturers reached CAD 147.2 million, up by 11.7%. As for the hardware retailers and renovation superstores market, sales stood at CAD 33 million, up by 3.1%.
In the U.S., sales totaled $64.7 million in U.S. dollar, up by 9.7%, 4.4% from internal growth and 5.3% from acquisitions. They reached CAD 83.1 million in Canadian dollars, an increase of 5%, it represented 31.6% of our total sales. Sales to manufacturers reached $58 million in U.S. dollar, up by 3.6%, of which 5.5% from acquisitions, due to the termination of a supply agreement with the major suppliers, a decrease of 1.9% of internal growth. With comparable sales, internal growth in the manufacturer market would have been 6.8%. Sales in U.S. dollar to hardware retailers and renovation superstores were up by 137% from the corresponding quarter of 2017. For the first half of 2018, sales totaled CAD 485.3 million, up by 10.5%, 5% from internal growth and 5.5% from acquisitions. At comparable exchange rates to the first half of 2017, sales growth would have been 12.3%.
Sales to manufacturers reached CAD 405.5 million, up by 8.9%, 2.3% from internal growth and 6.6% from acquisition. Sales to hardware retailers and renovation superstores grew by 19.6% or CAD 13.1 million to total CAD 79.8 million due to our market development efforts that has resulted in significant cyclical sales in the first and second quarter compared to the same period last year, mainly in the U.S. In Canada, sales reached CAD 324.2 million, up by CAD 34.8 million or 12%, of which 5.8% from internal growth and 6.2% from acquisitions. Our sales to manufacturers amounted to CAD 261 million, up by 13.3%, of which 5.5% from internal growth and 7.8% from acquisitions. Sales to hardware retailers and renovation superstores grew by 7%. In the U.S., sales amounted to $126.7 million in U.S. dollar, up by 13%.
8.2% from internal growth and 4.8% from acquisitions. They reach CAD 161.1 million in Canadian dollars, up by 7.6%, accounting for 33.2% of total sales. Sales to manufacturers reach $113.7 million in U.S. dollars, an increase of 6.7%, of which 1.7% came from internal growth and 5% from acquisitions. Sales in the hardware retailers and renovation superstore market were up by 132.1% in U.S. dollars. Second quarter EBITDA reached CAD 28.1 million, up by CAD 1.4 million, or 5.4% over the second quarter of 2017. Gross margin was down from the second quarter of 2017, influenced by the lower gross margin of our recent acquisitions due to their different product mix, as well as to direct sales initiative in the retail market with lower gross margin.
As a result of increased market development costs, the consolidation of two of our distribution centers in Western Canada, the reorganization of certain distribution centers, and the cost of implementing new technology, the EBITDA margin stood at 10.7% compared to 11% last year. First half EBITDA was CAD 47.9 million, up by CAD 2.9 million or 6.4%, and EBITDA margin stood at 9.9%. Second quarter net earnings attributable to shareholders total CAD 18.2 million, up by 3.3%. Net earnings per share were CAD 0.31 basic and diluted, an increase of 3.3%. Amortization expenses for the first half of 2018 amounted to CAD 6.5 million, compared with CAD 5.4 million for the same period of 2017, up by CAD 1.1 million, resulting mainly from the increase in capital and intangible assets acquired last year. First half net earnings attributable to shareholders reached CAD 30.9 million, up by 4.4%. Net earnings per share was CAD 0.53 diluted, up by 6%.
Second quarter cash flow from operating activities before net change in working capital balances amounted to CAD 22.4 million or CAD 0.38 per share, an increase of 7%. For the first half, they were up 7.5%, totaling CAD 38.5 million or CAD 0.66 per share. For the second quarter of 2018, dividends paid to shareholders amounted to CAD 3.5 million, up by CAD 0.2 million over the corresponding quarter of 2017. During the first six months, we paid dividends of CAD 6.9 million, up by 5.4%, and we purchased common share for CAD 5.2 million. We also invested CAD 6.6 million, of which CAD 2 million for business acquisition and CAD 4.6 million primarily for the purchase of equipment to improve operational efficiency. As at May 31, 2018, net cash totaled CAD 9.4 million, and our working capital was CAD 321.5 million for a current ratio of 4.8 to 1.
Turning to our outlook for the second half, our priorities will remain to focus on our innovation and our market penetration and development strategies to build further synergies with our latest acquisition to further improve operational efficiency, to identify and select acquisitions targets in North America, which are fully compatible with our long-term growth objectives. To continue to optimize our new AutoStore technology in St. Laurent that will contribute to further strengthen our competitive advantage in our market. We will continue to invest in our web technology in order to maintain our leading position and increase our B2B sales. Together with our excellent team, we will continue to build on our market knowledge and customers and innovation-oriented business model to record healthy results in the coming quarters. That concludes my overview. Thank you for your interest. We will now be happy to answer your questions.
Thank you, sir. Merci. Ladies and gentlemen, if you do have a question, please press star 1 on touchtone phone. If you would like to withdraw your request, you will need to press star 2. We ask if you're using a speakerphone to please lift the handset before pressing any keys. Your first question will be from Leon Agazarian at National Bank Financial. Please go ahead.
Hi, good afternoon.
Hi.
My first question, just on the termination of your supply agreement. Can you just disclose a little bit more color there? What were the reasons behind that? We're calculating about a CAD 5 million revenue drag there. Would that be correct? Is that how to look at it going forward as well?
You are absolutely correct. Basically, we continue to deal with that customer, but for certain products that we're supplying them, this customer decided to buy directly from Asia because they have restructured their purchasing department, and they have decided to go differently. They remain a good customer, and we continue to do business with them. That will go on for the rest of the year. That will quarter after quarter, you're going to see those missing sales for the rest of the year at least.
Okay. I guess because the second question here would be, there's a lot of uncertainty surrounding U.S. trade discussions with Europe and China. That's not related to that, right? We'd like to get more color about the possible negative impact on U.S. tariffs, right? I think 75% of Richelieu's purchases are made from foreign manufacturers. We're just trying to get some sense of what a potential impact there could be and in terms of inflationary costs for you.
Okay. Regarding that, the sales that we lost with that customer, that has nothing to do with the new tariff. Regarding the new tariff, what we're going to have to do, I would think the next couple of weeks, is to increase our price in the U.S. and in Canada as well for other products. We're going to have to live with whatever is decided by the U.S. government. Fortunately though, all our customers are aware of that as well as our competitor as well, That will be a trend in the market. That will certainly create inflation for a while.
What percentage of your purchases will be exposed to that, you would say?
We have approximately 20% in China and 15%-20% in Europe. The rest is mostly North America.
The exposure there would be on the 20% on the Chinese side and the 15% on the European side, right?
That's it. Possibly.
Possibly. It would be on some of the products or on most of the products that you're getting in, or what's the view there?
It's some of the products we want.
If we can move on maybe a little bit, just maybe comment on the performance of the end markets in terms of maybe the kitchen cabinetry and the commercial renovation side, which segments showed better growth than others, I would say?
Yeah. In Canada, actually, before acquisition, kitchen cabinet manufacturer sales in the last quarter increased by 6.6%. The commercial millwork increased by 6.5%. We had residential and office furniture that increased by about 18%. We have other market that increased for something like 5%.
Within wood geography, would that be specifically within Canada? Was there more strength in Eastern Canada, Ontario, or the West?
Yeah. Just for the manufacturers, sales in Eastern Canada increased by 7%, in Ontario by 4%, Western Canada 8%.
Okay. That seems to be quite strong all around. Maybe on the margin side now, we realized there were some initiatives that were taken since the beginning of the year. We saw the effect of that in Q1 as well, and now in Q2, particularly as it pertains to some of the new technologies you're implementing, as well as some of the reorganization of some of your distribution centers. Just kind of looking forward, do you still expect to see that impact in Q3 and Q4 into 2019? Or how should we look at the margin profile from a year-over-year perspective for the balance of the year?
I think in the fourth quarter, we're going to be finished with those reorganization. We're very proud about our investment here in Montreal from the St. Laurent warehouse with those AutoStore technology. That will really put ourselves in a very competitive advantage compared to our competitors, because I don't think that many of our competitors in Canada have the ability to invest in such a system, because of the volume that is required to justify those investments. It's a big plus. Regarding the reorganization of New Jersey and Western Canada as well, that has to be done. It's a growth situation where we have to expand our space, and we need to be better organized and that's part of the growth. That's something that it was a must to do for us. We're almost finished with that now.
Would you still expect any more of the reorganization of distribution centers, or will there be more cost associated to that?
That would be finished in the third quarter. As of the fourth quarter, everything should be back to normal.
What point do you expect to see some of the benefits of that? I'm just looking for a kind of a look into the margin profile for the latter half of the year.
I guess we're going to start to see the benefits in the fourth quarter, and we're going to see also the benefit in 2019 as well. The whole year is my point of view.
Okay. Last question from me would be just on the retailer side. On the Q1 call, you mentioned price increases for retailers that took place on April 1st. Can you talk to us a little bit about that and how much of the growth that we're seeing associated with the price increases versus maybe volume and maybe some color there, please?
Well, in Canada, we are very strong. For the first two quarters are strong for other retailers. It was very strong because of before our price increased, a lot of people placed their orders before the effect of the price increase. That has created some additional revenues for us. Plus the fact that we had new customers, that if we compare with the year before, we have the new customers that joined the parties. Basically, what we are up to now with probably the normal growth will continue on between 3% and 5%. That will probably for a couple of quarters consist of about a 3% price increase plus a growth of about 2%. That's my feeling in Canada. In the U.S., I think we're going to have a good growth in the quarters to come because of the customers that we are working on.
Actually, we're establishing ourselves in new stores. I guess in the, maybe not necessarily for the next quarter, but for the quarters to come, we should benefit from increased sales.
Sorry, just to circle back very quickly on the price increases to mitigate the U.S. tariffs, when do you expect those to be in place?
That would be in place as soon as we have to pay for those tariffs. I would say some price increases could take place next week and some others in two weeks from now. Basically, we're going to try to be slightly in advance to the cost increase with our price increase.
Okay. Thank you very much for your time.
Thank you.
Thank you. Next question will be from [inaudible] Please go ahead.
Hello. Congratulations on a strong growth this quarter. I just have two questions. I noticed that gross margins have been declining for some time now. There's obviously some one-offs, such as investment technology, consolidation of warehousing operations. There was a bit also on lower gross margin from direct sales to retailers and product mix. I'm just curious, is that a trend that we can expect to continue, or do we expect to see a bit of a uptick in gross margin from those efforts?
I don't know if we could explain it that way, but if we would speak about only the same store sales, meaning that the same sale that we had two years ago, when we did not add those direct sales to certain customers and to other type of customers that require a lower margin, I think the margin will be exactly the same that they were for the last five years, at least. Actually, we are aggressively pursuing additional sales. We're looking at the bottom line, basically. We have sometimes to sacrifice for new sales, additional sales, some margin, but at the bottom line, these sales are very good contributors as well. Also the new acquisition, the company that we acquire, usually they don't have the product mix that we have, so they contribute to lower our gross margin.
Plus the fact that in the U.S., the mix is not exactly the same as well. The more we sell in the U.S., the more we sacrifice some point of our global margin. The purpose is to improve the product mix in the U.S. as well over the years in order to catch up in Canada.
Okay, perfect. My second question is regarding share buyback. It was mentioned that I think CAD 5.2 million was bought back this past year, which is an increase over last year. Is there an expectation that increase will continue and will there be further buyback to come here?
Yeah, we're always on the market, and if there are blocks available, we're there. We feel that at this price, it's a good investment. We're gonna be there always on the hunt for blocks.
Perfect. Thanks so much for your time.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one on your touch-tone phone.
Okay, if there's no more questions, I would just like to thank you, all of you, and you can call us if you need more information at your convenience. Thank you very much and 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 ask that you please disconnect your line.