Richelieu Hardware Ltd.

Merci. Thank you.

Good afternoon ladies and gentlemen and welcome to the Richelieu conference call for the first quarter ended February 29, 2020. It needs to be noted down Antoine and I are attending from different locations via telephone.

As usual, know that some of today's issue include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings. In view of the current circumstances, this morning, we held our annual general meeting in attendance of the proxy holders.

In accordance with strict guidelines issued by government health authorities, we respectfully ask our shareholders to refrain from attending the meeting in person as such, our shareholders have participated by voting by proxy and they have the possibility to ask a question using two options made available to them. As we mentioned in our press release, Richelieu will continue to monitor the COVID-19 situation closely and to comply with all applicable health and safety guidelines issued by our governments and authorities.

I will come back to this point after our financial reading. Regarding our first quarter ended February 29, we are very pleased with our growth of 10.2% in sales, 18.9% in EBITDA, and 18.4% in net earnings attributable to shareholders.

We benefited from the strong contributions of our acquisitions added to a positive internal growth in our main market segments. We are pleased to see that our sustained innovation and acquisition strategies combined with our market development initiatives, our unique service concept, and the depth of our product lines positively impacted the quarter's performance.

Furthermore, during the quarter, we made three new acquisitions in Canada and in the U.S. That led our growth expansion criteria and give us access to new geographic markets, while strengthening our activities in markets where we were already present.

The three acquisition add approximately $60 million in sales on an annual basis as well as new customers, products, and expertise. They are Decotec, acquired in December 2019, which serves a customer base of Canadian manufacturers; Mibro, also acquired in last December, which serves a customer base of retailers in Canada and in the U.S.; and the last one acquired on February the 3rd, O'Harco, which serves mainly manufacturers and operates three centers in Nebraska, Iowa, and South Dakota, giving us access to these new geographic markets.

As we always do, we will create sales synergy with the new acquisition to our network, which now accounts 82 centers in North America. To conclude this overview, in an effort to protect Richelieu's current cash position and mitigate financial impact likely to result from the COVID-19 crisis, this morning, the Board of Directors have elected not to declare a new dividend for the first quarter of 2020.

I will now ask Antoine to go through the financial highlights of the first quarter. I will come back with additional comments.

Antoine?

Thanks Richard. First quarter sales reached $249.4 million, up by 10.2% of which 3.5% from internal growth and 6.7% from acquisitions.

At comparable U.S. exchange rate to 2019, sales growth would have been 10.6%.

Sales to manufacturers stood $210.5 million, up by 9.5%, 4.8% from internal growth and 4.7% from acquisitions. In the hardware retailers and renovation superstores market, we achieved sales of $38.9 million, up by $4.9 million or 14.4%, of which 18.5% from acquisition and internal decrease of 4.1% caused by the decrease of sales to retailers in the United States.

In Canada, sales amounted to $156.7 million, up by 9%, of which 3% from internal growth and 6% from acquisition. Our sales to manufacturers reach $127.6 million, up by 8.4%, of which 2.2% from internal growth and 6.2% from acquisitions.

As for the hardware retailers and renovation superstores market, sales stood at $29.1 million, up 11.9% of which 3.7% from internal growth and 8.2% from acquisitions. In the U.S., sales totaled $70.3 million in U.S.

dollar, up 13%, 5.1% from internal growth and 8.2% from acquisition. They reached CAD92.7 million in Canadian dollar, an increase of 12% and represented 37.2% of the total sales.

Sales to manufacturers reached $63 million in U.S. dollar, up by 12.1%, 9.8% from internal growth and 2.3% from acquisitions.

In the hardware retailers and renovation superstores market, sales grew by 23% of which 61.3% from acquisition and 38.3% of internal decrease caused by higher cyclical sales and initial sales made last year. First quarter EBITDA reached $24.9 million, up by $3.9 million or 18.9% over the first quarter of 2019.

The gross margin was maintained and the EBITDA margin improved due to increase in sales and continued control of expenses and stood at 10% compared to 9.2% same quarter last year. Amortization expenses for the first quarter of 2020 was up $1.1 million due to the increased amortization expense resulting from our latest business acquisitions.

First quarter net earnings attributable to shareholders total $11.8 million, up by 18.4%. Diluted net earnings per share rose to $0.21 compared with $0.17 for the first quarter of 2019, an increase of 23.5%.

First quarter cash flow from operating activities before net change in working capital balances amounting to $20.1 million, or $0.36 per share, an increase of 19.1%. For the first quarter of 2020, dividends paid to shareholders amounted to $3.8 million, up 3.8% over 2019.

We also invested $26.5 million of which $24 million for the three business acquisitions mentioned earlier and $2.4 million for new equipment to improve and maintain operational efficiency. Richard?

Thanks Antoine. In this difficult time, our priority is to take all appropriate steps to ensure the safety of our employees, suppliers, customers, families, and visitors while continuing supporting our customers.

In this regard, we make sure that we comply and exceed our guidelines from governments and authorities. COVID-19 has a serious impact on our business.

In most jurisdiction, all of our operation except three in Quebec continue as essential services and comply with local jurisdictions. We remain active wherever appropriate and authorized and have reorganized our activities in order to focus on essential services with most of our locations still being in operation with however reduced number of resources.

Our location, I've been operating under strict procedures intended to minimize contact between individuals and authentication procedures. March sale were strong in the first half, but we started to see a decline toward the end of the month and based on the last few days trend, our consolidated sales have negatively impacted by approximately 40%.

This is noting from a decline of 45% in Canada and 30% in the U.S. Mostly strictly, we are experiencing a decline of 75% in Quebec, 30% in Ontario, 25% in Western Canada, and 25% in the Atlantic Provinces.

We took important and difficult measures to adjust the cost structure accordingly, including workforce reduction, reduce hours, and the complete closure of few locations. We also reduce border diversions and my CEO remuneration by 25% and other manager by 20%.

We currently have over 600 employees working from home; thanks to our IT department. We are closing and rigorously winter in cash flows on a daily basis.

We are currently analyzing all government support program that that could apply to Richelieu in the future. More than ever, we make sure to keep our business model well adapted to the needs of our customers in Canada and in the U.S.

in order to meet their needs, and not stay their expectation, especially in these difficult market conditions. Keep in mind that our network of 52 interconnected distribution centers combined with our transactional website, which is also exceptional, otherwise to ship from every location across North America in a very short period of time.

Richelieu's value-added concept is still based on our diversify a unique product offering, our distinctive multi access service, our exceptional online service with Richelieu.com, and the sworn respects [ph] are watching. Our strong balance sheet and cash position will certainly help us to get through the difficult times.

Thanks everyone. We'll now be happy to answer your questions.

Hi, good afternoon. Richard thanks for those preliminary figures.

I may have missed some of them. Can you just remind us again what you were saying your quarter-to-date aggregate sales we're tracking?

We track -- actually we track our sales in the last five days to make sure that we analyzed the trend, the variability, current trends, and as I mentioned, our sales decreased by 40%. It's 45% in Canada, and 30% in the U.S.

This is basically the situation. That seems to be stable five days, that's our five days [ph] that -- regarding the way that characterize that?

Okay, so that--

If I can add, like Richard said, March started very strong. So, we started to see the decline more towards the end of the month.

And also it's important to mention, if you look at our first quarter, I think we have started this year very -- in a very, very strong manner with the sales increase and the profit increase that we've seen. Unfortunately, the COVID-19 is changing everything.

But that was supposed to be a very strong year for Richelieu.

Okay. And Richard, are you seeing your retailers sales, how are those holding up?

Because from what we're seeing seems like the big buck stores are actually performing a bit better than the rest of the market?

Yes, good question. We see a decrease of our sales by about 40% there as well.

But we think that that 40% should remain stable, so not only stable also the accounts receivable from those accounts is really very, very safe, so basically, what we see I think is only the worse -- I think the bottom of the barrel regarding the sales to other retailers. Maybe we can see some improvement in the future weeks depending on the government's decisions.

Okay. Richard, I appreciate the 40% figure that's helpful.

Is -- I'm not sure if you're able to parse out maybe how much -- how that figure would vary for your residential versus commercial end markets?

We see I guess retail, product is stable and solid market about that's why we many customers that also are still working because the -- therefore the essential services. So, our customers knew they repair roofing, they repair hospital, they repair places with that emergency need.

You see a lot of products being sold actually for the protection of the employees in the grocery stores and in the hardware store everywhere. So, we basically sell those products we -- initially we sell a lot of product at our anti -- whatever the -- I recall that antibacterial products that are very popular actually.

It's not that big sales, but it does create some sales and many of customers are working on that type of projects.

And Richard, if that 40% -- if we assume that that's largely a volume figure, are you expecting that we'll see some product pricing deflation that could kind of add to that? Or have you seen any signs of product pricing coming off?

No, we don't see that actually, I think it's also important to mention we don't see any price decrease in view. And we see also that we are on venture actually it is healthy at issue because we usually placed the first quarter of the year is a low quarter in terms of sales.

So, we always prepare the procurements to make sure that we have the inventory for the second quarter. So, all the product needed that were forecasted for the second quarter are already in place on the ocean coming.

So, basically, we -- having inventory, I think, is important. What's going to happen after that thing last more than two months, we don't know.

But so far, I think it's important to be secure with good inventory.

Okay. And Antoine I was just wondering if you could comment on how you're managing your receivables right now.

And any, any data points you might have there.

Yes, we're -- basically we're managing the receivable account by account-per-account. So, we've -- we -- it's clear with our credit officers that we're not taking additional risk with credit limits.

So, we are involved on a daily basis and we make sure we monitor the accounts receivable on a on a region-by-region basis. So, so far we did not we did not see any deterioration in terms of our day sales outstanding.

So, its -- we're looking at it on a daily basis I said. So, so far so good, but obviously this is this is definitely a risk that we are taking very seriously and monitoring.

Great. That's all I have for now.

I'll get back in the queue. Thanks.

Thank you very much. Congrats on the quarter.

Thanks.

So, a lot of the major questions have been asked already but given the end market uncertainty introduced by the pandemic, what are your CapEx plans for the rest of the year?

Before the pandemic, it was -- it would have been between the $10 million and $12 million. So, obviously, with everything that happens, the maintenance still needs to occur.

But we're going to review any CapEx demands. So, it's difficult to answer what it will be exact but it's going to be -- for sure, it's going to be lower than $10 to $12 million.

Understood. And so with CapEx trend and the dividend suspended for now, should we expect M&A activity to also be paused?

M&A activity will always be part of our strategy. So, we're always on the hunt.

We should not miss a good deal.

I actually think that due diligence on the ground might be a little bit difficult at the moment though.

You're exactly right. We are on the hunt, but closing as of today would be obviously very difficult, but the current environment will probably bring us some more opportunities in the future as well.

So, that was it.

Perfect. And then moving on to the hours and salary reductions, what degree are we looking at their terms, our reductions and then can you cut the salaries?

I can say that over 50% of our employees have been touched by either temporary layoff part time on reduced remuneration. So, basically, I think we've done what as what has to be done and fortunately, these are not very funny moves to make, but we did not have too much choice on that.

And I think the next step also standardized carefully the opportunity that the government support programs can bring to us, I think Antoine and his team would be walking on that next week and see what we can get from that because retaining our talents is very important, any company works well because of its team and its good employees. So, basically, we pay attention to that and we pay attention to our people.

And we're going to see the best that we can do to retain and to make sure that when the business come back all our tenants also back with us and happy at the same time, so but we follow-up that very closely. Actually, we have a cash position which is positive.

And we will try to maintain that and do our best to again, repeat myself to retain our talents for the long-term.

Thank you very much. And one last one for me.

You spoke a little bit to inventory and the supply chain and the 60 days on the water, but looking at longer term, if we do see a longer duration shutdown, what kind of actions can you take to deal with international interruptions?

Well, we can cancel some others we can -- we can't change our forecasts, actually, we -- the inventory that is coming will come, that's it. But before we reorder, we have to make sure that we address our forecast according to whatever the government will -- how they will relieve the various activities that will take place.

Basically, I think in the best interest of our government know when they made some changes to make sure that the small contractors and manufacturers of cabinets or whatever, are going to be back to life because actually, they are needed in the society and if you look in Canada and the U.S., 80% of our customers are small manufacturers and these guys -- they need to add some work and they need to survive and they need to move forward. So, hopefully, the government programs will contribute to -- for them for a better start.

That's very helpful. And then just one for Antoine.

We're seeing what looks to be a $3.6 million less to EBITDA from the implementation of IFRS 16. I would just say that that's accurate.

And you think that the level will stay fairly steady for Q2.

Yes, actually, it's -- the impact on the EBITDA is in the amortization and also in the interest and the total impact is $4.3 million. If you compare Q1 this year versus Q1 -- with or before IFRS 16, so the impact is $228,000, so the estimated total impact for 2020 of the IFRS implementation is approximately $1 million on the bottom-line.

Thank you very much. I'll leave it there.

Richard, is there any risk that you now have over-ordered with respect to inventories given the sales trends you mentioned over the last week?

Even though if that would be the case, that will not be a big problem. Actually, the only things we need is more space to -- start those products that would be in excess of our needs.

But I don't see that as a problem because the problem -- the product that we sell sells at, across North America, that are leaders of the customer. I don't think we have reached the end of the world.

The business will come back one day or the other and the inventory might cost some money to us, but it is low-cost -- warehousing products temporarily does not cost a fortune. And I think it's safe to have that inventory, but the situation though will be to look after - that thing that's forever.

We don't have a big problem here. But I don't see that as a big problem.

That could be a few million dollars let’s say $5 million to $10 million excess of inventory, Antoine. I don't think that that could hurt us a lot in terms of cash flows.

And regarding the warehousing costs, that doesn't cost a fortune and we don't -- and the inventory that is ordered is good inventory. These are good products that are needed by all our products in North America.

And don't forget that if you have a problem, our competitors also have a problem. If they don't have enough inventory, they you could be fooled and it's important for us to have good inventory,

Any concern that you might -- the inventory itself may be overpriced. I mean we're seeing deflationary pressures both in resins and in various metals.

And I just wondered if you thought there could be a potential impact on margins going forward if we see these deflationary pressures on the raw materials continue?

Yes, you're right. We could be impacted by that by how much?

I don't know. But again, all the industry have the same problem.

I guess the next order that we're going to place for the future quarters would be at a lower price. Yes, temporarily our margin could be affected by product that we have paid at the right price at the time that we bought it, but if we reorder now the same product should be at a lower price.

Yes, that's a risk. How much?

What is the impact exactly in dollars, I don't know. But that as a supplement pack, yes.

And I know you deal with a vast array of customers from very large to very small. Any concern in terms of bad debt, particularly with your small and medium sized private customers?

Yes, I think that we will have that concern. I think Antoine and his team monitor that very closely.

First of all, we could say that 15% to 20% of our sales are for the retailer, that's what is safe. We still have a lot of customers that are still active physically, they make good money and they pay their bills well.

And the other customer that we have are very small, I will let Antoine complete, how he sees that. But the small customers are taken individually are not big risk.

But overall, though, yes, that could represent additional bad debts, we don't know. We're very conservative.

Antoine, I will let you complete that because you have all the numbers in mind.

Yes, we're conservative on the bad debt -- on the provision, certainly, but we have --- like I said earlier, we monitor the accounts receivable on a daily basis. We make sure that we do not increase the risk on credit limits.

We encourage the payment by credit card. So, there are many things that we're doing and we're monitoring with our credit team.

But as of today, as we speak, we haven't seen a deterioration of the credit. So, as we speak -- but it's gone -- if there is, there will probably be one.

It's going to be in the next month or so.

If I may complete with the product range that we sell, actually our customers, if they have some business or they come back in business, I think it's good for them to pay their usual [dues] because they need our products. So, in order to have additional product, we'd have to pay their bill.

That does help. This is what we see -- that we've seen in the past and that should be the case again.

I think it's a good move for a customer to pay Richelieu in order to have the inventory that they will need to continue their business.

Thank you very much. Merci Richard.

Merci.

If there's no more question, thanks again. It's always a pleasure to talk to you.

Thank you very much for all your good questions and wish you good health. Stay safe until we have our next meeting for the next quarter.

Thank you very much. If you need to call us, we're there.

Thank you.