Good afternoon. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Richelieu Hardware first quarter 2018 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session for financial analysts. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Monsieur Richard Lord, President and Chief Executive Officer, you may begin your conference.
Thank you. Bonjour. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the first quarter ended February 28, 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. At our annual general meeting held this morning, it was a pleasure to highlight the 50th anniversary of Richelieu and the 25th anniversary of its listing on the TSX. We are off to a good start with our first quarter marked by higher results, notably by a strong sales growth in our manufacturers and retailers market, both in Canada and the U.S. Thanks to the ongoing contribution from our 2017 acquisitions, our market development, and innovation strategies, we are pleased with our performance, especially for our first quarter, which is historically the weakest period of the year.
On February 26, we closed the acquisition of Cabinet & Top Supply, a distributor of specialized products based in Fort Myers in Florida, which became our 9th distribution center in this important market. This new acquisition will add annual sales of approximately $4 million in U.S. dollars. As at February 28, our financial position was excellent, and this morning, the board of directors approved the payment of a quarterly dividend of CAD 0.06 per share. Now, let's look at financial highlights. First quarter sales reached CAD 222 million, up by 13.3%, of which 6.2% from internal growth and 7.1% from acquisitions. At comparable U.S. exchange rates to 2017, sales growth would have been 15.3%. Sales to manufacturers stood at CAD 183.4 million, up by 11.3%, 2.8% from internal growth and 8.5% from acquisitions. At comparable U.S. exchange rates to 2017, the internal growth would have been 4.8%.
In the hardware retailers and renovation superstore market, we achieved sales of CAD 38.6 million, up by 24%. In Canada, sales amounted to CAD 143.7 million, up by 14.4%, of which 5.6% from internal growth and 8.8% from acquisitions. Our sales to manufacturers reached CAD 113.6 million, up by 15.3%. As for the hardware retailers and renovation superstore market, sales stood at CAD 30.2 million, up by 11.4%. This growth is due mainly to market share gains and the addition of new customers. In the U.S., sales totaled $62.2 million, up by 17%, 2.7% from internal growth and 4.3% from acquisitions. They reached CAD 78.3 million in Canadian dollars, an increase of 11% and represented 35.2% of the total sales. Sales to manufacturers reached $56 million, up by 10.6%, 6% from internal growth and 4.5% from acquisitions. In the hardware retailers and renovation superstore market, sales grew by 123% in U.S. dollars.
This increase is the result of our market development efforts, including significant cyclical sales in the first quarter compared to the corresponding quarter of 2017. First quarter EBITDA reached CAD 19.8 million, up by CAD 1.5 million or 8% over the first quarter of 2017. Gross margin was down from the first quarter of 2017, mainly influenced by lower gross margin of recent acquisitions due to their different product mix, as well as a higher level of direct sales made in the first quarter. These factors, combined with the increased costs incurred during the quarter related to market development, the reorganization of certain distribution centers, and the implementation of a new technology also affected EBITDA margin, which stood at 8.9% compared to 9.4%. Amortization expenses for the first quarter of 2018 were up by CAD 0.6 million, resulting mainly from major investments in capital assets and business acquisition made in 2017.
First quarter net earnings attributable to shareholders totaled CAD 12.7 million, up by 5.9%. Diluted earnings per share rose to CAD 0.22, compared with CAD 0.20 for the first quarter of 2017, an increase of 10%. First quarter cash flows from operating activities before net trends in working capital balances amounted to CAD 16.2 million, or CAD 0.28 per share, an increase of 8.3%. During the first three months, we paid dividend of CAD 3.5 million, up by 5.4% over 2017. Repurchased 148,000 shares for CAD 4.5 million. We also invested CAD 4.7 million, of which CAD 2 million for a business acquisition and CAD 2.7 million to purchase new equipment to improve operational efficiency and IT equipment. As at February 28, 2018, cash totaled CAD 3.2 million, and our working capital was CAD 204.4 million, for a current ratio of 4.7 to 1.
Turning to our outlook, creating synergies through acquisitions and optimizing their potential will remain priorities in the coming quarters. We continue to focus on product information and innovation, market development, operational efficiency, and new acquisitions. New acquisition opportunities in the North American market. We are confident we'll achieve a good performance in upcoming periods. That concludes my overview. Thank you for your interest. We'd now be happy to answer your questions.
Thank you. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Your first question comes from the line of Leon Aghazarian from National Bank Financial. Please go ahead.
Hi, good afternoon, guys. Can you break down some of the sales by region? I'm trying to see if in Western Canada versus Quebec, Ontario, and then as well as by segment, i.e., your kitchen cabinet manufacturers, vis-à-vis residential, et cetera.
Yes, Leon. In Eastern Canada, our sales increased by 3.7%. In Ontario, sales increased by 7.6%. I can give you the details. The industrial sales were up by 6.5%. Sales to manufacturers were up by 6.5%, while the sales to other retailers were 10.5%. Western Canada, sales were up by 6.7%, which is composed of 2.5% for the manufacturers and 26% for the retailers. As a total in Canada, kitchen cabinet manufacturer sales increased by 4%. The commercial woodworking business increased by 6%. Residential furniture increased by 8%. Office furniture by 1.5%. Let's say that both together, they account for 10% in the increase. The retailers, as you already know, increased by 11%.
It seems to be pretty balanced throughout, whether it's the country and whether it's by segment, and it's fairly evenly spread out, I guess. My question is, what's the main reason for that? What's the competitive landscape looking like? Is that affecting in any way how you're seeing the business out there?
The business out there regarding the manufacturer, I would say it's okay in Ontario and Eastern Canada. Western Canada, we see that we still have an increase for the manufacturer at 2.5%, which is, I think it's very interesting considering the circumstances and how the retailer is at. For the time being, it's a booming market for us.
On the press release, you highlight that the winning of new customers and market share gains in Canadian retailers. What's been driving that? Is it new business? Can you talk to us a little bit more in detail as to
Yes
what kind of market share gains that is?
We continuously, year after year, made a good investment in order to improve our sales to hardware retailers. We have gained the Lowe's business across Canada. Last year, we have gained many other customers in other market segments, like for builders hardware, for decorative hardware. Many new customers as well in Western Canada. Independent retailers that are now with us that used to be with our U.S. competitors. Basically, we did a very good job both in terms of displaying the products and selling the products to those customers by convincing them that they're gonna make more money selling our products than the products of anybody else.
Are you seeing any difference with what you're seeing at the U.S. retailer level? You published a pretty strong number in terms of U.S. retailer too.
Yeah.
Can you maybe talk to us a little bit about that?
Yeah, the numbers are very, very strong in the U.S. Again, most of the sales, the increase of sales is due to direct sales and cyclical sales, which is higher than usual, much higher than usual. It's good news for us, but it's also the result of additional customers. Fortunately, with those cyclical sales, does help the quarter. In the future, we actually will see a gain. We've gained probably another CAD 3 million that's gonna come later on during the year to other retailers in the U.S. New customers like True Value Hardware, like Mills Fleet Farm, What's the other one?
Sutherland.
Sutherland. Those are not very well-known names here in Canada, but in Canada, Mills and Sutherland, they each have 100 stores. Basically for us, it's the type of development that we like. It's not a huge amount of business, but it also spread our risk in this market. Basically, we're quite happy to have gained those new customers, and we're gonna start delivering them some in the third quarter and some in the fourth quarter of this year.
Mm-hmm. You've had some, I guess, would you call them initiatives where you've been spending some cash in terms of automating certain distribution centers, pardon me, in the U.S. Can you just talk to us a little about some of this near-term pressure? How long should we expect some of those costs to be in the year? I'm just trying to look ahead to see what we should be looking for in terms of margins.
We are in the process of installing an AutoStore here in Ville Saint-Laurent. It's an investment. The value of the equipment is about CAD 6 million. I guess the installation at one would be something like a couple of million CAD. I would say that we still have at least a quarter to go with more expenses because actually things are doing fine. I have visited the warehouse here last week with Antoine, and things are really smooth, actually. The system is functioning very well. What we're left with, actually, the reorganization of the space that we have saved because of that new machinery. Now we have to reorganize a part of the warehouse. I guess we're going to have those expenses finished at the end of the second quarter. We should be back in normal at that time.
Okay. I appreciate that. One final one, I guess. We did see a very small tuck-in in Florida as it pertains to some more M&A. What's your pipeline looking like? Any change to what you've been seeing recently in terms of, I guess, pricing or more opportunities that way?
Florida is interesting because actually we really are very well-positioned with nine distribution centers in Florida. Our market share will increase. Actually, I'm very happy with how things are going in Chicago and other areas of the U.S., actually, where we see that things are up-taking trade in terms of traditional culture and increased sales as well. Regarding the opportunities for acquisition, maybe, Antoine, do you have more details you can add to that?
Yeah, Leon, the pipeline is still very healthy, either in Canada and the U.S. We have a few files open, and it's pretty much standard pipeline. Yes, we still have nice opportunities in front of us.
Are they all of the tuck-in variety of this type of size, or are you seeing any other opportunities, like larger ones, potentially in the U.S.?
It's between, I would say, CAD 3 million and CAD 10 million. This is what we have in hand, actually.
Okay. Nothing larger than that. Okay. Thank you. I'll turn it over.
Thank you.
Again, to ask a question, please press star, followed by the number one on your telephone keypad. Your next question comes from the line of Jose Desjardins from BMO Nesbitt Burns. Please go ahead.
Yes. Good morning, everybody, and congratulations again on your results. I'm very happy to be a shareholder of Richelieu. I have just a little question regarding the recent behavior of the share on the market. We've seen a dip close to 14%, this is the largest dip since we have been shareholders of the company, we see positive results, positive growth, nice margins. Our clients are saying a bit, "What's going on? Is it the U.S.? What's going on with Mr. Trump? Or is it maybe the conditions with the hardware that you are dealing with, like Home Depot or other people like that?" How would you comfort your investors saying that maybe it's a buying opportunity at the current level around CAD 29 when we come from CAD 35?
The best way to comfort investors is to make the clear demonstration to you guys that we are doing our job. We have the growth. We continue to invest, those investment results in the fabulous sales increase. That's the way that we have to work when we're in charge of a company. It's to generate the growth through a smart investment. Regarding the price of the share, unfortunately, we don't have any control on that. That's up to the people that own the share that decide to sell for whatever reason. Some read the papers, they get scared because the stock actually is going down. Some are making profit because they're losing some money somewhere else.
I can have many arguments like that, my job is not to argument on the price of the share, to convince you, though, that we can continue to drive this company in the right direction and bring the results that you are used to see.
Okay. You still have a buyback program in place for-
Oh, yeah. Yes, sir.
Okay. I thought maybe with the buyback program, the stock would hold a bit higher, but I'm comfortable with your answer. We believe in your company, and thank you for keeping up the good work in the industry.
Thank you very much.
Thanks.
Your next question comes from the line of Scott Carscallen from Mackenzie Investments. Please go ahead.
Yes, hi. I just wanted to expand a little bit further on the margin question. You touched on some of the additional expenses that you were putting in place for, I guess, new technology in the warehouses. Looking back to your last quarterly conference call, the fourth quarter conference call, you had mentioned a couple of things. One, that you were planning to announce some price increases in the second quarter and third quarter, and you also said you expected to see 2018 margins getting back to the historical levels. Are those two items still relevant, still the case?
Regarding the gross margin, yes. The price increase for the retailers will take place somewhere in March. April 1st, I think, is the date. We're going to start to see part of the result in the second quarter and the rest in the third quarter. This is why we also have a big increase in our sales for the retailer market in Canada. It's because we have announced the price increase for the end of March or beginning of April. In the first quarter, they have already placed some orders. They have increased their inventory because they wanted to benefit from the price before the increase. That's one of the reasons why the sales increased so much. Regarding the gross margin as well, we have those cyclical sales, meaning some direct sales.
In the retailers, in that type of market, you have to do some, what we call here, the yearly bookings. For example, the retailers, they buy their screws at this time of the year. Sometimes for this year, we sell more than ever, for whatever reason. Maybe our price is too low, I don't know. We see our margin as being reasonable in the circumstances. That does affect our gross margin, but it does not change much about the EBITDA because those are the results of direct sales. What else could we add to that, Antoine? What did I forget to mention?
Scott, by adding an acquisition like we've concluded with Weston, this will have an effect on the gross margin because it's a product category that brings lower gross margin. That can also dilute the percentage of margin.
Right. The Florida acquisition, are you able to say if their margins are comparable to Richelieu's? Are they lower?
No, they're comparable to the other DC that we have in the U.S., lower.
Right.
That's the name of the game.
Sure. Great. Thank you.
Thank you very much.
There are no further questions at this time. Monsieur Lord, I turn the call back over to you.
If there's no more question, thank you very much for attending this call. We're always pleased to talk to you if you have more questions. Bye-bye.
This concludes today's conference call. You may now disconnect.