Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware Second Quarter 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. This call is being recorded on July 8, 2021.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the Q2 6 month period ended May 31, 2021. With me is Antoine Oclare, CFO. As usual, note that some of storage issue include forward looking information, We just provided the usual disclaimer as reported in our financial filings. We are really pleased with our 2nd quarter.
Our results showed strong growth and our financial position remains sound and solid. For comparison, it should be noted that during the same period last year, Our sales were negatively impacted by a general decline in business due to the pandemic. Both in the U. S. And in Canada, All our market segments have done very well, whether it be the kitchen cabinet manufacturers, architectural network and the residential and office region.
We are particularly proud of the solid growth in markets where we recently made acquisitions and product innovation, such as door and window manufacturers, Closet manufacturers and glaziers. Our hardware retailers market also showed strong growth during the quarter. Thanks to our outstanding website, our one stop shop approach and our entrepreneurship. Entertainment network that enables us To make product available to our customers in a timely manner and provide alternatives when needed. As a result, The sales increase combined with cost control has positively impacted our profit margins, where we posted an EBITDA margin of 16.4% During the quarter, the strength of our business model, the quality of our team and the ability of our organization to carefully adjust the market conditions Before I take, we were able to provide the best possible support to our customers in the actual circumstances.
During the period, We also successfully pursued our initial strategy and sees good opportunities, meeting our criteria of complementary Synergy potential has long term value growth. We completed 3 acquisitions in the last 3 months, the latest on July 5. As mentioned in our previous release, on 825, we acquired the shares of TAS Tools, a distributor of our tool accessories Unrelated products serving the hardware retailers market in Canada and in the U. S. We also signed 2 agreements in principle, One of which was completed with the acquisition of Ofcan Industrial Fasteners Limited on June 1.
Ofcan is a leading importer and distributor of screws, bolts and industrial fasteners, opening a distribution center in Montreal, from which it supplies hardware retailers mainly in Eastern Canada. On July 5, we acquired 25% of the shares of NTEFCO Inc, the distributor of digital ten products for the construction industry in Canada And in the U. S, operating 2 centers in Ontario and 3 in the U. S, in Arribula, Ohio and Texas. Interesting to note that this acquisition will be combined to 1 of our divisions already operating in this sector of activity and currently in Western Canada.
In addition, We signed another agreement in principle for an acquisition in the U. S. Altogether, this transaction with ad sales of $73,000,000 and an MEO business. I will now move to Antoine for the financial review of the period.
Thanks, Richard. 2nd quarter sales reached €271,400,000 UP 49.6 Percent, of Which 46.8 Percent From Internal Growth And 2.8% from acquisition. At comparable exchange rate to last year, sales increase would have been 56%. Those increases are the result of the strong demand in the renovation market compared to last year, where sales have been negatively impacted due to the slowdown in business resulting from the pandemic. In Canada, sales amounted to $248,100,000 up 59.8 percent of which 56.7 percent from internal growth and 3.1% from acquisitions.
Our sales to manufacturers reached €203,700,000 up 63.5 percent of which 61.7 percent from internal growth and 1.8% from acquisitions. As for the hardware retailers, Sales stood at €44,400,000 up 45.1%, 37.4% from internal growth and 7.7% from acquisitions. In the U. S, sales grew to $99,400,000 up 49.5%, 47% from internal growth and 2.5% from acquisitions. As in Canada, the renovation market in the United States has been growing strongly.
Sales to manufacturers reached $87,000,000 in U. S. Dollars up 52.6%, 50% from internal growth and 2.6 In the hardware retailers and innovation superstores market, sales grew by 30.9%, mostly from internal growth. Total sales in the U. S.
Reached CAD 123,300,000 an increase of 32.6 percent And representing 33.2 percent of total sales. For the first half of twenty twenty one, Sales totaled €669,000,000 up 34.4 percent of which 2.5% from acquisition and 31.9% from internal growth. In Canada, sales reached $441,300,000 up by $129,400,000 Or 41.5 percent of which 39.5 percent from internal growth and 2% from acquisitions. Sales to manufacturers reached $357,300,000 up $104,800,000 or 41.5 Mostly from internal growth. Sales to hardware retailers and renovation superstores reached $84,000,000 compared to $59,400,000 up 41 point In the U.
S, sales amounted to $181,300,000 in U. S. Dollar, up 32.5%, Of which 28.8 percent from internal growth and 3.7 percent from acquisitions. They reached 227,700,000 In Canadian dollar, up by 22.6%, accounting for 34% of total sales. Sales to manufacturers totaled $156,100,000 an increase of $38,500,000 or 32.7 percent, of which 28.5% from internal growth and 4.2% from acquisitions.
Sales to hardware retailers and renovation superstores We're up 31% compared to last year. 2nd quarter EBITDA reached CAD61 1,000,000 Up $27,200,000 or 80.5 percent over last year, resulting from significant increase in sales and continued control of expenses. Gross margin improved slightly and the EBITDA margin stood at 16.4% compared to 13.6% last year. First half EBITDA reached $99,100,000 up 69%. For the EBITDA margin, it stood at 14.8% compared to 11.8% last year.
2nd quarter net earnings attributable to shareholders totaled $37,400,000 111.4 percent net earnings per share were 0.67 dollars basic and 0.66 dollars diluted compared to $0.31 basic and diluted last year, an increase of 116.1 percent 112.9 percent, respectively. First half net earnings attributable to shareholders reached $58,400,000 up 98.1 percent. Diluted net earnings per share Stood at $1.03 compared to $0.52 last year, up 98.1%. 2nd quarter cash flow from operating activities before a net change in working capital balances amounted to 46,500,000 Or $0.82 per share, an increase of 74% compared to last year, resulting primarily from The net earnings growth. For the first half, they were 63.2 percent, totaling $76,000,000 or $1.36 per share.
For the Q2 of 2021, financing activities used cash flow of $6,700,000 compared to $2,800,000 last year. Dividends paid to shareholders of the corporation amounted to $3,900,000 while no dividend was paid in the corresponding quarter of 2020. First half financing activities used cash flow of $22,400,000 compared to $10,600,000 in 2020. Dividends paid to shareholders amounted to $11,600,000 compared to $3,800,000 last year. In the Q1 of 2021, a special dividend of $0.0667 per share was paid in addition to a quarterly dividend of $0.07 per share.
We also repurchased common share for an amount of $3,300,000 in the first half of twenty twenty one, while no share repurchased in 2020. During the Q2, we invested $13,900,000 $16,700,000 in the first half of which $9,800,000 for business acquisitions And $6,900,000 primarily for the purchase of equipment to maintain and improve operational efficiency, including the addition of IT licenses. We continue to benefit from a healthy and solid financial position, cash balance of $89,600,000 almost no debt A working capital of $416,300,000 for a current ratio of 3.7:one and a return on average equity of 20.4%. I now turn it over to Richard.
Thank you, Antoine. In conclusion, our value added service concept Remains the cornerstone of our leadership. It's based on innovation and product offering, the more diversified and pointed offering in our market, covering The widest range of specialty product categories. On simple and easy access to our products, whether through our network of 1 stop centers, Welcome to our Shop Centers and through our Traveling World website richelieu.com on the quality and reliability of our service And the broader end of unit sales tools, no market that we provide to our customers. Our decision to maintain our measured level at the beginning of the pandemic Showed to be the right decision and our customers are still benefiting from it.
We continue to do our utmost to support them. We expect our manufacturer market continuing to be strong. To this end, we anticipate a strong future growth in the U. S. And in order to meet demand and provide the best possible service, we have several expansion projects on the table for some of our U.
S. Centers notably in Detroit, Atlanta, Dallas, Boston and Orlando. In addition, we will open a new center in Pennsylvania, likely at the end of the Q3 of 2021. As for the sales of our retailers market, we do not expect growth in the second half Given the exceptional sales in the last two quarters of 2020, however, compared to 2019, Retailers market should be should show a very healthy growth and should continue to be strong in the coming quarters. We remain highly vigilant to market conditions and closely monitor prices and worldwide transportation cost increases.
If necessary, selling prices will be adjusted accordingly. We are confident in initial year's trend and great potential to continue to grow In the coming period, I'll execute its strategy in order to create long term value. Thanks, everyone. And I'll be happy to answer your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session for analysts One moment for your first question. Your first question comes from Hamir Patel with CIBC. Hamir, please go ahead.
Hi, good afternoon and congratulations on a strong quarter.
Thank you. Richard, I wanted to follow-up on
the Point you made about retailers, I think you said you didn't expect growth that should still be up healthy versus 2019. Obviously, clearly, we'll be year over year down, but any sort of order of magnitude on at least compared to the elevated 2020 levels, we should expect for the retailer category in the back half of the year?
Yes. I think if you remember well, in the 2 last quarters, the sales of what it has increased by something like, correct me if I'm wrong, I want something like a 40%, 45%. So It could be very hard to surpass that. So we compare ourselves with 2019, which and we expect the growth to be The high double digit growth still in the last two quarters compared to 2019.
Okay. That's very helpful. And then Richard, anything you could share on how June has fared for sales in the manufacturers category?
The manufacturers category is still very strong, continue about at the same pace that you've seen in the last the second quarter. And we expect that to continue on for at least for a few months because actually we see we think there is a lot of cash in the market. The consumers have been piling up cash in both in U. S. And Canada in the last year.
And also, Many projects have been delayed because many people that have projects for renovations like kitchen cabinet or closet have to delay their project Because they cannot find a contractor to do the job. So it's postponing some work. And I guess with the cash available in the market And the feeling that we've got from our customers because we are in constant discussion with our customers, we expect them to be very busy still for a few months. Okay.
And then Richard, just coming back to the retailers market, other than obviously these Tough year over year comps. We've seen signs of the DIY segment slowing in recent months. Have you seen something similar for your products? Or has there been maybe differences in terms of actual product impacts on DIY?
Yes. Compared to last year, we see it. We also see that some of the retailers, when we add enough stock, they have created maybe Yes, buy more inventory that's really needed in order to secure the business there. So that would be it's also creating some building in the future ordering. And you're right.
The consumers buy for the less now than was so certainly less now that they were buying last year. There's no doubt about that.
Great. That's all I have
for now. I'll get back in the queue. Thanks.
Thank you. Your next question comes from Migraine Annette with TD Securities. Migraine, please go ahead.
Thank you. Good afternoon. So looking at the EBITDA margin, a really strong performance there in the quarter. Are there any one time benefits that you would call out here? And as we think about the rest of this year and fiscal 2022, just on an annual basis, can you maybe update your thoughts on where you see the EBITDA margin trending, maybe relative to 2019?
No. And again, there's no one time in there, but The high volume is favorably impacting the EBITDA margin. Well, that's the main impact. We're being very rigorous in terms of cost control, but the strong sales volume It's benefiting the EBITDA margin, that's for sure. And as for the rest of the year, so it should continue to be a high margin Versus last year, so you should and looking at the future, if you're looking if you're using the 2019 EBITDA margin, you should see improvement as well because the 2020 EBITDA margin was not necessarily Recurrent, but if you use 2019 with improvement on It should be on target.
Okay.
And just thinking about input costs Some price increases, Richard, I think you touched on this a little bit. So I think we're in a fairly unique environment here where we've seen costs rise at a rapid pace, But then we're also seeing some relief now on the cost side. So how do you manage pricing with the customer in an environment like this? And Do you see any reluctance to purchase from customers in an environment such as this?
Not at all. Our pricing is, I think the hardware I would say that since 2019, the price has increased by roughly close to 10%, which is Far from being the increases that we've seen for the lumber, for example. So basically, the actual situation, we keep a close Very close eye to whatever is happening to the market for our products. So the way we manage our Pricing is to protect our gross margin as a percentage. So if we have cost increases and freight increases that we expect We change our pricing immediately.
As far as the manufacturers are concerned, it takes 24 hours to change our pricing except maybe 20% of our customers are on quotation. Unfortunately, retailers usually takes between 60 days 90 days, which is the Which is normal with that type of customer. So basically, you can be assured that our gross margin, as such, is very well protected.
Okay. And just last question. So in light of some of those global supply chain challenges, can you just talk about Your approach to inventory management, are you seeing any challenges there in sourcing key products? And then as we see some of that slowdown take place Or maybe more of a normalization with the retailers. How do you plan for that from an inventory standpoint in terms of your
purchases? Today's circumstances, as we speak, we are getting our product In 2 years, North America, when it comes from Europe and Asia, it's a challenge. We have a location for containers, for the extra containers because we have a lot of extra We pay a higher price. Some of it we can transfer to selling prices, but some we don't. But whatever, we do not neglect any possibility to in order to have a better service to our customers.
So we pay the high price if we have to pay to bring the containers in And we don't pay air freight if necessary to maintain whatever it is necessary. So basically, Those extra expenses, though, are largely compensated by increased sales, as you can see in our last quarter financials. And we expect that to continue on for a few months. And I'd say you would be actually the Small decrease, the decrease that we see as we speak now with the hardware retailers, it would probably create an impact that in 2 months, 3 months from now, We might have a bit more inventory that would be needed, but we don't see that as a problem. For the manufacturers, though, We expect the goal that you see now to continue on for maybe not forever, but for many months.
Great. Thank you for all the color.
Thank you. We have a following question from Zakaria Rashid with National Bank. Zakari, please go ahead.
Thank you. Good afternoon, everyone. Congrats on the quarter. Thank you.
So you've got a great pace of M and
A set up thus far in 2021. Can you tell me a little bit about the pipeline and if
you think you can keep up that pace?
I will let Antoine complete my comments, but we're very proud of the acquisition that we made so far. As we already discussed in the previous months, we see that More people are willing to sell their business for whatever reason. I think the pandemic is just another storm in their lives. I think BBB has enough storm In their life, we all the downturn businesses that we had before and some will sell also because they had a good year. So since we made a profit this year, we said about, okay, now it's time to sell the business.
So because of that, we even though the multiple would be So we're going to pay a higher price because they have to do more profit this year. But that's not a problem for us because there's material Differences in the price that you would have stayed without the pandemic, Antoine, what do you have to do?
No, you're right. The pipeline is very healthy in Canada and the U. S. So on the retailer's market and the manufacturer's market as well. So we're very busy.
We're working on nice opportunities as we speak. So you should be hearing from us in the next few months.
And we have other opportunities coming.
Great news. Thanks. And you've really got cash burning a hole in your pocket at this point. Any plans for Dividend hike or more significant activity on the NCIB?
It's a very good question. We asked ourselves the same question. We don't know we never did something like that, and we it's not the first time that we're in a cash position like What we see now, depending our priority will remain the acquisition And Antoine, what would you like to add on that?
Yes. Definitely, acquisition is the priority. We have a share buyback program in place as well. So there are a few options to use this cash.
Great color. Thanks. And then in terms of the expansion in the U. S, what kind of expenditure do you expect over what time line?
Actually, the expansion that we're doing in the trial is in process now. It should be completed at the end of August. I want to be completed if we don't encounter any procurement problems or whatever the racking that need this type of thing. We never know what's going to happen in these days. So the trial will be we're going to go from 50,000 square feet to 140,000 square feet.
We also have to be only 50, but we have to pay for exterior warehouses that we will have the possibility to eliminate now. Atlanta is going to go from 50 to 150. Our management team over there, with all the projects that we have, are justified to us a good business plan That will largely compensate and increase sales, the investment that will be required to empower ourselves in that warehouse. And actually, we have we're opening a new warehouse also we will opening we'll be opening a new warehouse in Pennsylvania. So that we actually we service the consumer yard market from our New Jersey warehouse.
New Jersey warehouse actually It's back to the rules. It's overcapacity. So that will give our lease to New Jersey and give us the opportunity to expand our sales In Pennsylvania. And the other projects are Orlando, Texas is already done. We went from, I don't remember what, From 40,000 to 50,000 80,000 square feet?
Yes. No, unless we went from 45,000 to 70,000 square feet.
50,000 square feet. Okay. So basically, all this project is the project we're working on now and should be completed. Many of them will be completed before the end of the year.
That's great. Thanks. And then just one last one for me. We've already talked quite a bit about margins on the call. Could you help us break out how much is really torque on the higher top line and how much is a reduction in your overall central cost structure.
And there's also some gross margin left in there. Is that correct?
Yes, slight increase on the growth. Basically, the EBITDA margin On a normal volume, it would be somewhere between 12.5% 13%.
Makes sense. Thank you very much. I'll turn it over.
Thank you. Your next question comes from Robert Currie with Louisbourg Investments. Robert, please go ahead.
Hi, guys. Great quarter.
Thank you, Drew.
Just wanted to ask a few questions on some mix changes that may have happened over the past little bit, Just to kind of recalibrate, if you don't mind. So when we look at renovation versus newbuilds, you guys have usually been 3 quarters renovation, quarter newbuild or something like that. That changed at all? Are we kind of seeing like a similar over the past several months as you guys think it ramped up?
That has not changed. Both the sales to our retailers are related to innovation as well as the kitchen cabinet and the close-up manufacturer. But we see actually More sales to the new construction doesn't change the percentage as such, but we see more and more higher end ounces in condominium being built. And those I was reading lately that some statistics saying that on the new construction, The cost for the kitchen cabinet is something like 4%. So if you buy a new house for $1,000,000 which is high end Quite a high end house.
So the kitchen cabinet will be worth $40,000 minimum, while in a new construction for a house that's held For $200,000 both the bathroom and the kitchen cabinet will account for only 4%, so $12,000 So the $12,000 kitchen cabinet and painting in your bathroom, and so you cannot at this price, you don't even have anything in your closet Except the new, what was the reason to hang the clothes. So basically, it's only $12,000 for that. It's really minimal. So that does not require many Richelieu products to But usually, in a new house, even though it's a house that is worth $200,000 or $250,000 We do innovation 5 years after the bargain warehouse. So that brings some market for the future for us as well and our customers.
Right.
That's helpful. Then just thinking about your mix, you guys have talked before in the past about how some of your U. S. Business is a little more commoditized And when you compare it to your Canadian business in terms of the actual products being sold, and you guys have mentioned the goal being to Trying to change that, the attitude in the U. S.
To want more premium products. Has that been also playing a part here?
I mean, it's not just for products. Our product mix in the U. S. Continue to improve. And it's actually, we know that the EBITDA margin in the U.
S. Is not very far from the one that we have in Canada. And so basically, our exclusive product, as we already said that 60% of the product that we sell are either exclusive or Richelieu Broadme products. And we see all those products actually being very attractive for the U. S.
Market. Richelieu is becoming more and more well known. And also, I think the COVID situation also made it was a springboard for Richelieu to attract new customers, new calls for people that were not contacting us before. So basically, I think the investment that we're going to make in the U. S.
Are going to open the growth for More important growth in the future that we've seen in the past.
Yes. And it's actually a good segue into the next question on when you think about On the U. S. Or even Canada as well. But looking at market share versus just torque in general, how would you guys break down your growth in the past few very Strong quarters in terms of actually winning market share versus general market growth.
Obviously, you don't need to repeat the numbers, but just kind of general ideas.
I would say 50% market growth and 20%
new market penetration. Last question I have for you here is just on I want to kind of paint a scenario for you and I'm curious if you kind of give me some guidance. I just want to think about the operating leverage within your business just given the gross margin. If you kind of if you were able to double your business over the next 5 years In terms of top line, similar gross margin profile, so the products are very similar to the mix you have right now. Where do you think your actual EBITDA margin could go from here?
Is it kind of top out at close to 20%? Or if you even tripled your business from here, could you actually see your margin getting up Higher to that like 30% margin or you think that being below 20% is kind of that's really where you're because it's a capital light business, it's kind of where you're probably going to max out at. Just curious if you could provide any kind of clarity on where the potential margin profile of the business really is. Just seeing like this quarter, seeing such a big jump in margin, I'm sure I understand how much of that is really available as you guys continue to grow over the next 5, 10 years?
If we continue to grow, there's no doubt that our EBITDA margin will continue to grow as well. Going that 3%, 20%, that would be a dream. It's like If you were being following us putting up on us since a few years ago, keep seeing the investors, my dream is to reach a 20% return on the how do you call that of 1 of the as you announced a few minutes ago? Yes. The average the return on average equity.
Average equity. So basically, I think it's an amazing number. And I think the EBITDA margin, I think if we dream of increasing our sales depending on the type of investment and other expenses that would be needed To achieve it, I think, yes, the EBITDA margin should be could be close to 15%. I don't know. It's hard to tell that because Let's say if we don't do anything, we just increase our sales, not making any further investment, staying as we are now.
We certainly reached 20%, yes, no doubt. But to get that $1,000,000,000 additional sales will certainly require Extra expenses and acquisition with lower EBITDA margin that will dilute the actual EBITDA margin that we're achieving, that type of thing. But we also remain that Well, the result together is to increase that we did the larger we have products. Yes.
I mean, obviously, you guys have been around for a while. You guys Excellent track record. But you're still relatively small. So I'm just I'm kind of assuming that there's still quite a runway left of acquisitions and internal growth just in general. So I'm just going to size up what the a lot of companies, it just seems like they can have margin expansion forever, but at one point, it's going to stop.
And I'm just wondering where Let's stop. It's for you guys of what your real level of where it can really go from here. So it sounds like what you're saying is 20% is high. And so you can see it, you guys get to north 15% realistically over the next little bit if you kind of continue to grow in the direction you have been. That's the way
I should interpret it. Does that make sense, Antoine? Yes. If you look historically, the highest that we've reached historically is 14.5%. So we were in that area at some point.
So
Was that pre IFRS 16? Or is that including Pre
IFRS, yes, pre IFRS.
Yes. And that would have been before expanding heavily in the U. S. And then doing all the
I know you guys have done
a lot of, I don't know how you're going to call it, but expansions of your warehouses that have created some headwinds on margin?
You're exactly right. So that's prior to The accelerated growth in the U. S. But now as you can see, the EBITDA margin is improving year after year. It all depends on the kind of investment we're making with acquisition, for example.
But same store sales, the EBITDA margin is always increasing.
Thank
you. It appears there are no more questions at this time. Mr. Lord, you may proceed.
Thank you to all of you. There's no more questions. So we will always be happy to meet you or to talk to you over the phone if you need more if you have more questions. Thank you very much and have a very nice day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask you to please disconnect your lines. Have a great day.