Richelieu Hardware Ltd. (RCH), a leading distributor of specialty hardware and complementary products, maintained stable sales in the first quarter of 2024, matching the previous year's performance despite challenging market conditions. The company's strategic acquisitions and market development initiatives played a significant role in this outcome.
However, Richelieu's margins were impacted by higher inventory costs and the start-up phase of recently modernized distribution centers. The company reported a decrease in EBITDA and net earnings compared to the first quarter of 2023. Despite these challenges, Richelieu remains focused on innovation, controlling costs, and developing strategic markets.
Key Takeaways
- Richelieu's Q1 sales remained consistent with the previous year at $407 million.
- The company completed three acquisitions, contributing an estimated $60 million to annual sales.
- EBITDA for Q1 was down 17.7% year-over-year, and net earnings attributable to shareholders decreased by 35.7%.
- The company's financial position remains strong with $623.4 million in working capital and minimal debt.
- Richelieu paid dividends of $8.4 million and invested $15.5 million, including $7.4 million for two business acquisitions.
Company Outlook
- Richelieu anticipates improvements in performance from the first to the third quarter.
- The company will continue to focus on innovation, cost control, and strategic market development.
- Richelieu's network is well-positioned to capture future market growth.
Bearish Highlights
- First quarter margins were affected by sales of higher-priced inventory at market price and the start-up of modernized centers.
- Operating expenses related to expansion projects were identified as temporary, impacting EBITDA by over $2.5 million.
- The hardware retailers and renovation superstores market sales were down by 2.7%.
Bullish Highlights
- Richelieu achieved a good level of sales equivalent to Q1 of 2023, supported by acquisitions and market development initiatives.
- Sales to manufacturers stood at $350 million, up 1.6%, mostly from acquisitions.
- In the U.S., sales grew by 1.7%, with 1.1% from internal growth and 0.6% from acquisitions.
Misses
- Diluted net earnings per share decreased to $0.27 from $0.40 in the same quarter last year.
- The company experienced a 3.7% decrease in the Richelieu Cabinet industry business, with residential furniture in Eastern Canada down by 15%.
Q&A Highlights
- Richard Lord explained the drop in EBITDA margin was due to inventory costs that are higher than current costs and increased expenses from modernization projects.
- CFO Antoine Auclair noted that Q1 is typically the weakest period, and they expect Q2, Q3, and Q4 to be around two points higher than Q1.
- The company anticipates working through the remaining high-priced inventory by the third quarter, which should improve margins.
Richelieu Hardware's performance in the first quarter of 2024 reflects the company's resilience in a challenging market. While sales remained steady, the company's profitability was affected by factors such as high inventory costs and the start-up phase of modernized centers. Richelieu's strategic acquisitions have bolstered its market presence and are expected to contribute to future growth. Despite the downturn in EBITDA and net earnings, the company's robust financial position and minimal debt underscore its capacity to navigate market fluctuations and continue its growth trajectory.
Full transcript - None (RHUHF) Q1 2024:
Operator: Good afternoon ladies and gentlemen and welcome to Richelieu Hardware First Quarter Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session, which will be restricted to analysts only. [Operator Instructions] This call is being recorded on April 11, 2024. [Foreign Language]
Richard Lord: Good afternoon, ladies and gentlemen. First of all, I have to apologize for my voice. I have a cold. Please, I will try to do my best to handle that speech. I welcome to Richelieu's conference call for the first quarter ended February 29, 2024. With me is Antoine Auclair, our 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. Our financial year began with a good first quarter. We pursued our acquisition strategy closing two new acquisitions followed by a third one on March 27. We achieved a good level of sales, equivalent to the first quarter of 2023, which is appreciable since first quarter sales last year continued to benefit from favorable market conditions. This result reflects a significant contribution of our acquisitions and market development initiatives, supported by our strategies of value-added service, innovation and market segment diversification. It should be remembered that the first quarter is always the weakest period of the year. Regarding our first quarter margins, they were affected by two main factors. [Indiscernible], lower gross margin and the start-up period of centers extended in 2023. Despite the significant reduction in our inventory over the past year, we still have certain inventories purchased at higher price than [current] [ph] costs. The sales of these products at market price has had a negative impact on our gross margin. We expect the situation to be resolved, as these products are reordered. Secondly, as already announced with several of our distribution centers underwent expansion and modernization projects in 2023, including our new Calgary center, which went operational last December. The start-up and development of these centers, in addition to being impacted by current market condition, have also affected our margins downwards. We are actively working on these expanded and modernized centers in order to accelerate the start-up and market development. As far acquisition, we are very pleased with the three businesses we have acquired since the beginning of the year. Olympic Forest Products is a distributor of specialized lumber and panel products with the distribution centers in Erin, Ontario. And Rapid Start is a distributor of specialty hardware to a distribution center in Rittman, Ohio. On March 27, we completed the acquisition of Allegheny Plywood, a distributor of specialty panels and the collective surfaces, which operates the distribution centers in Pittsburgh and Allentown, Pennsylvania, as well as in Cleveland, Ohio. In addition to contributing approximately $60 million to annual sales these three transactions add new customers, complementary products and expertise and strengthen our presence in this market. And now, I'll hand over to Antoine for quarterly financial review.
Antoine Auclair: Thanks, Richard. First quarter sales reached $407 million, up 1%, a 0.4% internal decrease offset by 1.4% growth through acquisitions. Sales to manufacturers stood at $350 million up 1.6%, mostly from acquisitions. In the hardware, retailers and renovation superstores market, we achieved sales of $57.3 million down $1.6 million or 2.7%. In Canada, sales amounted to $232 million similar to last year. Sales to manufacturers reached $188 million and hardware retailers and renovation superstores market sales stood at $44.5 million, down 2%. In the U.S., sales grew to US$130 million, up 1.7%, 1.1% from internal growth and 0.6% from acquisitions. They reached $175 million, an increase of 1.6% and represented 43% of total sales. Sales to manufacturers reached US$120 million, up, 2.2%, 1.7% from internal growth and 0.5% from acquisitions. The hardware retailers and renovation superstores market sales were down 4% from the corresponding quarter of 2023. First quarter EBITDA reached $40.4 million down $8.7 million or 17.7% over the first quarter of 2023. The lower gross margin and our 2023 expansion projects being in start-up phase in the current market condition affected the EBITDA margin downwards. As a result, the EBITDA margin was 9.9% this quarter. First quarter net earnings attributable to shareholders totaled $15.2 million down 35.7%. Diluted net earnings per share was $0.27 compared to $0.40 last year. First quarter cash flow from operating activities before net change and non-cash working capital balances was $35 million or $0.62 per share. The net change in non-cash working capital used cash flow of $34 million, mainly reflecting the increase in inventories and the decrease in accounts payable and accrued liabilities while accounts receivable and other items represented a cash inflow of $1.2 million. As a result, operating activities provided a cash inflow of $0.5 million, compared to a cash inflow of $18.8 million last year. We paid dividend of $8.4 million to shareholders and we invested $15.5 million, including $7.4 million for two business acquisitions and $8 million in CapEx, of which $3.5 million relating to extension projects. At the end of the quarter, the financial situation was healthy and solid with working capital of $623.4 million and almost no debt. I now turn it over to Richard.
Richard Lord: Thank you, Antoine. In conclusion, our priorities as to pursue our innovation and business acquisition strategies, develop synergies with our acquisitions, control costs, and develop strategic markets. We continue to build on our strengths, our team, our value-added service with logistic tailored to customer needs. Our financial solidity and our efficient network enables us to extend our coverage in the North American market, more and more. With our ability to adapt to changing market conditions, we continue to seize and create opportunities while remaining service, innovation and result oriented. Thanks everyone. I'll be happy to answer your questions.
Operator: [Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets.
Hamir Patel: Hi. Good afternoon. Richard, the EBITDA margins dipped below 10% in Q1. Do you think the first quarter marked a trough for margins? What kind of recovery would you expect on the margin front into the second quarter?
Richard Lord: I can explain the drop in the EBITDA margin because of the, what we call those inventory costs that are higher than the current costs. That has cost to us during the quarter $3.5 billion. The modernized project that we achieved in 2023 increased our expenses by $2.5 million. I think these investments were pretty good and would bring a lot of sales in the future, but since the market is slow, as we speak, we don't recover as quickly as we were expecting. There is also increases expenses. As you know, we have not started yet to increase our own selling pricing. That should happen early in the fourth quarter and maybe in 2025. For the time being, we cannot increase our pricing for the reason that you already know, but our costs have increased at the same time. If you take the salaries and the rent, that type of expenses, that created $1.5 billion of additional expenses. So basically, I think things will improve. The more the years is going to go, the more it's going to improve, mainly, I would say, from the first to third quarter, we expect the situation to improve.
Antoine Auclair: Hamir, one element to consider is that the Q1 is always the weakest period. So, usually, Q2, Q3 and Q4 are around two points higher than Q1 due to a lower volume in Q1 versus the other quarters.
Hamir Patel: Okay. Fair to say then, all else being equal, if it's two points higher, you'd be sort of north of 12% would be kind of the low-end for Q2?
Richard Lord: Yes.
Hamir Patel: Fair enough. And then are you able to, Richard, comment on sales comps across the business in the month of March?
Richard Lord: Yes. What we've seen is that, we have the Richelieu Cabinet industry business has decreased by 3.7%. I would say, the worst decrease come from the residential furniture. In Eastern Canada, for example, the residential furniture has decreased by 15%. I think the people making residential furniture as we speak have a hard time. Basically, this is the toughest market that we're dealing with. I would say, we're well with our market that has still sustained good like the middle work, which we call a commercial innovation. It's higher by 4% and so it's not that bad. And office furniture is down by 2%. The retail market as you know is down by 2.7%.
Operator: [Operator Instructions] Your next question comes from Zachary Evershed from National Bank.
Zachary Evershed: Thank you for taking my questions and sorry to hear you're not feeling well Richard.
Richard Lord: I'm feeling good. Just some cold here.
Zachary Evershed: Perfect. Organic growth was only marginally negative in the quarter. Would you say that end market demand is recovering more quickly than you anticipated at the beginning of the year?
Antoine Auclair: It's Antoine, Zach. It's still soft, but what you need to understand is that, when we compare ourselves with Q1 2023, Q1 2023 was equal to 2022. It's still very healthy out there. So, we think that we are more conservative on the first half of the year, but we think that, the second half could be stronger than the first half.
Richard Lord: In the market situation that we know, I think achieving the sales we have achieved, I think it's pretty good. I think we performed very well for the market in each region that people are all there doing their job, selling the products and promoting and whatever has to be done. And we think with the, in circumstances we think that this result are very, very good.
Zachary Evershed: Thank you. And then you identified inventory costs as being a $3.5 million drag in the quarter. When do you expect to work through the remaining high priced inventory?
Antoine Auclair: We have to reorder all the products. So basically we have started, we think that starting in the third quarter we're going to see a substantial improvement, but unfortunately for the financial statement, as you understand, for the IFRS, we have to work with the average cost. So, if we buy a new product with a 10% less, regarding the cost compared to the cost that we had before, that means that the 10, the economy is not going directly into the growth margin because we have to work with the average cost, but basically things would improve.
Zachary Evershed: And then if we look at the operating expenses related to expansion projects, those are categorized as temporary in your press release. Does that mean that your fixed cost absorption is temporarily low while you're ramping up volumes or are there specific items that you won't be paying for in the near future?
Antoine Auclair: You're right, your first comment is pretty much the one, so of course, we have some moving expenses in there, but the main reason is that the fact that we're in ramping mode, so it takes some time to absorb the fixed costs. So, it had an impact of over $2.5 million in the EBITDA for the quarter.
Zachary Evershed: And then given your anticipation of an improving H2 versus some of the forecasts that we're seeing for an overall declining market in repair and renovation in the U.S., how do you feel about your current install capacity? The amount of distribution centers you have in the U.S.?
Richard Lord: I think the network, with all the investment that we've done in the network, I think where there to capture this effect that we're in good shape. On that front we are in good shape.
Zachary Evershed: Thank you very much.
Operator: And there are no further questions at this time. I will turn the call back over to Richard Lord for closing remarks.
Richard Lord: There's no more question. Thanks to all of you again. We’re always pleased to talk to you, should you have the desire to call us. Bye-bye.
Operator: Ladies and gentlemen, this concludes your conference call for today. You may now disconnect your lines. Thank you.
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