Afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Second Quarter Results Conference Call. At this time, note that all lines are in a listen only mode. But following the presentation, we will conduct a question and answer session, which will be restricted to analysts only. Note that the conference is being recorded today, Thursday, July 5.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the second quarter ended May 3138. With me is Antoine Houcair, 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. We have maintained good growth during our second quarter and first half ended January 31, as we actively pursued our market development strategy and increased 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 continued 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 at our financial highlights. Second quarter sales reached $163,400,000 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 $222,200,000 up by 7%, 2% from internal growth and 5% from acquisitions. In the hardware retailers and innovation superstores market, we achieved sales of $41,200,000 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 $180,200,000 up by 10%, of which 5.9 from internal growth and 4.1% from acquisitions.
Our sales manufacturers reached $147,200,000 up by 11.7%. As for the hardware retailers' annual renovation superstores market, sales stood at $33,000,000 up by 3.1. In The U. S, sales totaled $64,700,000 in U. S.
Dollars, up by 9.7%, 4.4% from internal growth and 5.3% from acquisitions. We reached $83,100,000 in Canadian dollars, an increase of 5% and it represented 31.6% of our total sales. Sales to manufacturers reached US58 million dollars up by 3.6%, of which 5.5% from acquisitions and 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 innovation superstores were up by 137% from the corresponding quarter of twenty seventeen. For the 2018, sales totaled €485,300,000 up by 10.5%, 5% from internal growth and 5.5% from acquisitions. At comparable exchange rates to the 2017, sales growth would have been 12.3%. Sales to manufacturers reached 405,500,000.0, up by 8.9%, 2.2% from internal growth and 6.6% from acquisition.
Sales to hardware retailers and innovation superstores grew by nineteen point six percent or $13,100,000 to total $79,800,000 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 $324,200,000 up by $34,800,000 or 12%, of which 5.8% from internal growth and 6.2% from acquisitions. Our sales to manufacturers amounted to $261,000,000 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 €126,700,000 in U. S. Dollars, up by 13%, 8.2% from internal growth and 4.8% from acquisitions. They reached $161,100,000 in Canadian dollars, up by 7.6%, accounting for 33.2% of total sales.
Sales to manufacturers reached US113.7 million dollars an increase of 6.7%, of which 1.7% came from internal growth and 5% from acquisitions. Turning to hardware retailers and innovation superstores market, were up by 132.1% in U. S. Dollar. Second quarter EBITDA reached $28,100,000 up by $1,400,000 or 5.4% over the 2017.
Gross margin was down from the 2017, influenced by the lower gross margin of our recent acquisitions due to their different product mix as well as to direct sales in Interceptive 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 $47,900,000 up by $2,900,000 or 6.4% and EBITDA margin stood at 9.9. Second quarter net earnings attributable to shareholders totaled €18,200,000 up by 3.3%. Net earnings per share were €0.31 basic and diluted, an increase of 3.3%.
Amortization expenses for the 2018 amounted to EUR 6,500,000.0 compared with EUR 5,400,000.0 for the same period of 2017, up by EUR 1,100,000.0, resulting mainly from the increase in capital and intangible assets acquired last year. First half net earnings attributable to shareholders reached €30,900,000 up by 4.4%. Net earnings per share was EUR $0.05 3 diluted, up by 6%. Second quarter cash flow from operating activities before net change in working capital balances amounted to EUR 22,400,000.0 or EUR $0.03 8 per share, an increase of 7%. For the first half, they were up 7.5%, totaling EUR 38,500,000.0 or EUR $0.06 6 per share.
For the 2018, dividends paid to shareholders amounted to $3,500,000 up by $200,000 over the corresponding quarter of 2017. During the first six months, we paid dividends of $6,900,000 up by 5.4% and repurchased common share for $5,200,000 We also invested $6,600,000 of which $2,000,000 for business acquisition and $4,600,000 primarily for the purchase of equipment to improve operational efficiency. As of May 3138, net cash totaled €9,400,000 and our working capital was 3 and 21,500,000.0 for a current ratio of 4.8:one. 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 objective to continue to optimize our new auto store technology in Saint Laurent that will contribute to further strengthen our competitive advantage in our market. We'll 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'll now be happy to answer your questions.
Thank you, sir. Touched on phone. And if you would like to withdraw your request, you will need to press star followed by 2. And we ask if you're using your speakerphone to please lift a handset before pressing any keys. And your first question will be from Tian Aghazarian at National Bank Financial.
Please go ahead.
Hi, good afternoon.
Hi.
My first question just on the determination of your supply agreement. Can just disclose a little bit more color there? I mean, what were the reasons behind that? And we're calculating about a 5,000,000 revenue drag there. Would that be correct?
And is that kind of how to look at it going forward as well?
You are absolutely correct. Basically, we continue to deal with that customers, but for certain products that we were supplying them, this customer decided to buy directly from Asia because they have restructured their purchasing department and they have decided to go differently. But we they remain good customers, and we continue to do business with them. And that will go on for the rest of the year. That will quarter after quarter, you're going to see those missing sales what?
For the rest of the year at least.
Okay. So I guess because the second question here would be, mean, there's a lot of uncertainty surrounding, I mean, U. S. Trade discussions with Europe and China. I mean, so that's not related to that, right?
Because we'd like to get more color about the positive about the possible negative impact on U. S. Tariffs, right? I mean, I think 75% of Richard U. S.
Purchases are made from foreign manufacturers. So we're just trying to get some sense of what a potential impact there could be in terms of inflationary costs for you.
Okay. Regarding that those let's say that we lost with that customer that has nothing to do with the new tariff. But regarding the new tariff, what we're going to have to do, I would say in the next couple of weeks is to increase our price in The U. S. And in Canada as well for the for other products.
So we're going to have to live with the whatever is decided by the U. S. Government. But fortunately, to all the our suppliers our customers and are aware of that as well as our competitors as well. So that will be a trend in the market.
That will certainly create inflation for a while.
And so what percentage of your purchases will be exposed to that, you would say? We have approximately 20% in China and 15% to 20% in Europe. The rest is mostly North America. Okay. So the exposure there would be on the 20% on the Chinese side and the 15% on the European side, right?
Yes. That's it. Possibly.
Possibly. And 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.
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 setup, which segments showed better growth than others, I would say?
Yes. In Canada, actually, before acquisition, construction capital manufacturer sales in the last quarter increased by 6.6%. The commercial millwork increased by 6.5%. And we had residential and office furniture that increased by about 18%. And we have other market that increased for something like 5%.
Okay. And then within would that be specifically within Canada? Was there more strength in Eastern Canada, Ontario or the Yes.
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. Mean, we realized maybe on the margin side, 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, I mean, you still expect to see that impact in Q3 and Q4 into 2019?
Or kind of 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 see we're going to be finished with those reorganization. But we're very proud about our investment here in Montreal for the in the center warehouse with those auto storage technology that will really put ourselves in a very competitive advantage compared to our competitors because I don't think that that many body in Canada as the 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. So 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 we it was a must to do for us and we're almost finished with that now.
So 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.
And then 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 to feel 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 so the whole year is my point of view.
Okay. And then last question for me would be just beyond the retailer side. I mean, on the Q1 call, you mentioned price increases for retailers that took place on April 1. Can you talk to us a little bit about that and how that's been I mean, how much of the growth has been that we're seeing associated with the price increases versus maybe volume and maybe some color there, please?
Well, in Canada, we had very strong for the first two quarters, our strong Travel Retailer it was very strong because of before our price increase, a lot of people placed their orders before the effect of the price increase. So that has created some additional expenses additional revenues for us and plus the fact that we had new customers that if we compare with the year before, we had new customers that joined the parties. So basically, what we were up to now with probably the normal growth will continue on between 35% that we bought it for a couple of quarters consists of the about a 3% price increase plus 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 were 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, and 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. 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 Peter Matas at Logo LP. 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, and there's obviously some one offs such as investment technology, consolidation of warehousing operations. But 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 an 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 sales that we had two years ago, we did not add those sales to direct sales to certain customers and to other type of customers that require lower margin. I think the margin would be exactly the same that they were for the last five years at least. So but actually, we are aggressively pursuing additional sales. We're looking at the bottom line basically. So we have sometimes a sacrifice for new sales, additional sales, some margin, but at the bottom line that these sales are very, very good contributors as well.
And also the new acquisition, company that we acquire usually did not have the product mix that we have, so they contribute 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.
But 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 buybacks. You mentioned it was mentioned that, I think, 5,200,000.0 was brought back this past year, which is an increase over last year. Can we is there an expectation that, that increase will continue? And will there be further buybacks in the coming year?
Yes. We're going to we're always on the market. And if there are blocks available, we're there. So we feel that it's at this price, it's a good investment. So we're going to be there always on the hunt for blocks.
Perfect. Thanks so much for your time.
Thank
Okay. If there's no more questions, I would like 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 lines.