Richelieu Hardware Ltd.

Merci. Good afternoon, ladies and gentlemen, and welcome to the Richelieu's conference call for the third quarter and nine month period ended August 31, 2019.

With me is Antoine Auclair, CFO. As usual, note that some of today's issue includes forward-looking information which is provided with the usual disclaimer, as reported in our financial filings.

Richelieu performed well in the third quarter as shown by increases in sales, EBITDA, net earnings, and cash flows compared to last year. Note that the third quarter had one less business day than last year negatively impacting sales by 1.5%.

Despite a softer market in Canada, our growth was fueled by the contribution of our five acquisitions made over the past 12 months, namely Euro Architectural Components, Lion Industries, Blackstone Building Products, Truform Building Products, and Chair City Supply. Together, they posted a good performance on the manufacturers market, both in Canada and in the U.S.

The manufacturers market softness is felt across Canada but more importantly in Alberta and the Atlantic provinces. As for the retailers market in Canada, as mentioned in previous quarters, the store closures, the inventory realignment of our retail customers combined with a softer market had a negative impact on our sales.

Cyclical sales were also lower this quarter. However, we are particularly pleased with our U.S.

performance where our sales increased by 8.2%, including acquisitions and also by the continued improvement in our margins in this market. Our consolidated EBITDA margin as a percentage slightly increased as a result of rigorous control on gross margins as well as operational costs.

I will come back with additional information and comments, but I will now ask Antoine to go through the financial highlights. Antoine?

Thanks Richard. Third quarter sales reached $269 million, up by 3.4%, of which 5% from acquisition and 1.6% from internal decrease.

In Canada, sales amounted to $180 million, up by 0.7%, of which 4.7% from acquisition and 4% from internal decrease. Our sales to manufacturers reached $147.9 million, up by 3%.

As for the hardware retailers and renovation superstores market, sales stood at $32 million, down 8.8%. In the U.S., sales totaled 67.5 million in U.S.

dollars, an increase of 8.2%. Sales to manufacturers reached 64.9 million in U.S.

dollars, an increase of 8.9%, of which 3.1% resulted from internal growth and 5.8% from acquisitions. Sales to hardware retailers and renovation superstores were down 10.3%, however, are showing year-to-date growth of 10.8%.

Total sales in the U.S. reached $89.3 million in Canadian dollars, an increase of 9.2% and accounted for 33% of total sales.

For the first nine months of 2019, sales totaled 777 million, up 4.2%, 0.4% from internal growth and 3.8% from acquisitions. In Canada, sales reached 507 million up by $3.3 million or 0.7%, of which 2.7% resulted from acquisition, and an internal decrease of 2.1%.

Sales to manufacturers rose to 417.6 million, up by 12.9 million or 3.2%, mostly resulting from acquisitions. Sales to hardware retailers and renovation superstores reached 89.1 million, compared to 98.7 million down 9.7%.

In the U.S., sales amounted to $203 million in U.S. dollars, up by 7.5%, 1.6% from internal growth and 5.9% from acquisitions.

They reached $270 million in Canadian dollars, up by 11.5%, accounting for 34.8% of total sales. Sales to manufacturers totaled 185.3 million, an increase of $12.5 million or 7.2% over the same period last year, of which 0.8% resulted from internal growth and 6.4% resulted from acquisitions.

As reported in previous quarters, the internal growth in the manufacturers market was affected by the termination of a supply agreement with a major customer. Note that at comparable sales levels, internal growth in the U.S.

manufacturers’ market would have been 3.4%. Sales to hardware retailers and renovation superstores were up 10.8% versus 2018.

Third quarter EBITDA reached $30.2 million, up by $1.3 million or 4.3% over last year. Gross margin and EBITDA margin improved slightly.

The EBITDA margin stood at 11.2%, compared to 11.1% last year. For the first nine months, EBITDA reached $78.3 million, up 2%.

Gross margin remained stable. As for the EBITDA margin, it stood at 10.1% compared to 10.3% last year.

The EBITDA was impacted by the slowdown in the hardware retailer market in Canada and market development costs incurred to increase our offering and our presence in the retailers’ market in the U.S. Third quarter net earnings attributable to shareholders totaled $18.6 million, up 1.3%.

Net earnings per share were $0.33 basic and diluted, an increase of 3.1%. For the first nine months, net earnings attributable to shareholders reached $48 million, down 2.6%.

Diluted net earnings per share stood at $0.84. Third quarter cash flow from operating activities before net change in working capital balance amounted to $23.4 million [ph] or $0.41 per share, an increase of 4.3%.

For the first nine months, [indiscernible] totaled $61 million or $1.06 per share. For the third quarter of 2019, dividend paid amounted to $3.6 million, up by 4.4%.

Since the beginning of fiscal year, we repurchased common shares for $9.4 million, including $4.9 million during the third quarter. During the first nine months, we paid dividend of $10.8 million, up by 4.3%.

We also invested $28.4 million for business acquisitions and $7.6 million primarily for equipment to maintain and improve our operational efficiency. We continue to benefit from a healthy and solid financial position, cash balance of $14.8 million, almost no debt, and working capital of $346.8 million for a current ratio of 4.5:1.

I now will turn it over to Richard.

Thanks Antoine. Our ongoing innovation and market penetration strategies enable us to grow in various market segments.

Our development efforts in specialized markets such as door and window hardware, closet, glass hardware, architectural hardware and stainless steel components for stairs, banisters, and railings were reinforced by our recent acquisitions resulting in a 20% sales growth in these markets. We continue to improve our operational efficiency and customer service.

Our auto store system implemented last year continues to deliver as per expectation. This robotic system is highly effective, reliable, and provides Richelieu with a significant competitive advantage.

We just launched a new project to expand the current auto store footprint to add up 5,000 product locations. This will require an investment of about $500,000.

Speaking about competitive advantage, we also are constantly investing in our unique website which is largely used by our customers and the website is a very important contributor to our success. We are also proud to increase our presence and seize new market opportunity in the important New York market where we are moving our Long Island City location to a larger one in the same area.

It will be a key location that will include a state-of-the-art and welcoming home available for our customers and New York architectural designers. Turning to our outlook.

We remain focused on outstanding customer service, market share gains in Canada and the U.S., the new synergies, operational efficiencies and profitability and new acquisition opportunity compatible with our growth objectives. We remain confident that our strategies of ongoing innovation, market development and acquisition will continue to bring good results and end the year with a strong and stable financial position.

We have grown this company to $1 billion of sales, over $100 million of EBITDA with no debt. Our priority is to continue on the path of growth by ensuring that we always have the strategies, human resources and systems in place in order to keep our leadership and remain a strong innovative and customer driven company.

Thanks everyone. We will now be happy to answer your questions.

Good afternoon. Thanks for taking my questions.

Good afternoon.

I was hoping if you could speak more about the auto store expansion. What is being added?

We just add locations. We are going to add the possibility of storing between 5,000 and 7,000 more products into the auto stores.

The result of that will be to increase our operational efficiency as well as to shorten our delivery time, which is the fastest way to deliver the type of product that we are selling at Richelieu. So that will add to our competitive advantage as well to expedite all deliveries and save costs.

Thank you. That's helpful.

And it's actually my tie into that. U.S.

sales made up a larger portion of consolidated sales versus the same quarter of last year and you have indicated in the past that your U.S. margins are generally lower than your margins in Canada, yet this quarter, despite softening markets and growing exposure in the U.S., margins increased 10 basis points year-over-year on EBITDA.

So, could you provide us with some insight into where that's coming from?

I think that's the result of a rigorous control of our margins and not to name our selling prices as well as the operational costs as also we’re working hard in order to save on the cost of trade which is actually quite expensive in North America, I mean all over the world. So, basically, I think we have a good team in the U.S.

They have a good plan, and they drive the business the way it should be driven.

And do you think that there is more you can extract there?

There will always be more to extract.

Moving on to the activity in Canada, which has been poor year-to-date. Have you seen any signs of end markets turning a corner?

No. The softness in the third quarter was felt pretty much all across Canada, but like we said, it's more importantly in the Atlantic provinces and also in Alberta.

Yes. Alberta is down by something like 10%.

Quebec will still be up compared to last year and as well as BC. The rest of the markets are slightly negative, including Ontario, which is down by 4%.

But I don't want to confuse you with some other information, but I can tell you though that including acquisition in the East, sales increased by 6%, Ontario increased by 9.7%, as a result mainly of the latest acquisition. Western Canada will be decreasing by only 0.3%, compared to 3.5% without acquisitions.

So overall, in Canada, as mentioned in Antoine's report, sales increased by 3.1%. So basically, we are quite happy with the results, including our acquisitions.

Thank you for the extra information. That's very helpful.

Any sign of things turning around in the months since the quarter ended?

No. I would say, it's up totally for the manufacturers market.

But I think regarding the retailer market in the first quarter of the following fiscal, I think we are going to see improvement. It cannot be worse because we know the percentage of sales or the sales performance per POS for our big retailing customers on that.

Actually, we see there is a big difference between their purchases and their POS performance. So that means that they keep reducing and realign their inventory.

So that cannot last forever, so we expect that to be improving in the future quarters. So, eventually it would be back to normal.

Okay. Thank you.

Except for the store closures, for those that have been closed, we don't expect them to reopen.

That's fair. Then, on the impact that we are seeing on the retailer front, how much do you think is attributable to the inventory rightsizing?

And how much is end market slowness?

I would say, it's 80% in inventory realignment, the rest is in soft market, yes.

Excellent. Thank you.

And we have brought this up in the past, but the Home Depot new self pickup lockers are seeing positive reactions. Are you seeing any impact on your sales or have any customer mentioned it?

No. That doesn't have any impact with us.

That's clear. Moving on to the M&A pipeline, always an important topic.

How is it looking these days?

Exciting. So, we are busy and we keep working hard, and if the business become more difficult, that would be just having more possibility of an acquisition, but for the time being, I think this is a very healthy pipeline.

The list of acquisitions that we have on our table, we will probably make other moves very soon.

And in the context of a weaker market in Canada, do you think that may cause an acceleration of the pace of M&A?

Yes. That will certainly be favorable to that.

Excellent. And one last one from me then.

How did the various end markets perform? Any weak spots in your manufacturing end markets?

No. It was pretty steady in all of our markets, Zach.

Excellent. Thank you very much for the extra color.

I will turn it over.

Antoine, can you just talk to the working capital. It looks like you have taken a lot out of both inventory and receivables?

How do you see the rest of the year playing out from a working capital perspective?

Yes. Usually the fourth quarter is pretty neutral.

So, third quarter is usually favorable. But also if you remember, last quarter, in the second quarter, we had very large sales, very large cyclical sales.

So basically, we got the receivables entering the third quarter and we are also working very hard to reduce inventory. But, I am not expecting a major reversal in the fourth quarter.

So, the major reversal we got it in the third quarter, so it should be neutral in the fourth quarter, and usually the first quarter is where you invest in your inventory in order to capture the busier markets in the spring.

Okay. And lastly, should we expect the same pace of use on the normal course issuer bid in the next quarter?

Yes.

Okay. Thank you very much.

Thank you very much. And it's always a pleasure to talk to you.

So, we’ll be in our office if you have further questions. It was a pleasure to talk to you.

Have a good afternoon.