Richelieu Hardware Ltd.

Thank you. Good afternoon, ladies and gentlemen, and welcome to this Richelieu conference call for the second quarter and six months period ended May 31, 2020.

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.

The second quarter was marked by a never before experienced business environment. In such context, Richelieu nevertheless realized an appreciable financial performance and maintain a solid and healthy financial position.

We hold this performance to our one stop shop product approach, as well as the diversification of our market segments, our customer service, the contribution of our acquisitions, and the measures we rapidly and effectively implemented to mitigate the impact of the situation, such as temporary layoffs, reduced working hours and salaries, and suspension of all travel. Up to approximately 60% of our workforce has been impacted by those measures, and about 20% are still affected as we speak.

In addition, some 600 employees are also working from home. Thanks to our IT department that diligently provided the proper infrastructure and support, including compliance with the best security.

Aligned with the pre-COVID trend, March started very strong, but April was impacted by the pandemic. Overall, all our distribution centers in Canada and in the U.S.

with the exception of three in Quebec that closed temporarily for only a few days, all the others remained operating as essential services with resources adapted to the current business volume. We saw substantial improvement in May, which continued in June in the manufacturers market, but especially in the retailers and renovation superstores market.

Our priority is to serve our customers. We therefore decided to maintain our inventory level, which proves appropriate considering the higher than expected demand we are currently experiencing, namely in the retailers and renovation superstores market.

I should also point out that we have not slowed down our acquisition strategy. During the quarter, we continue to identify new acquisitions that meets our value creation criteria.

And on June 29, we completed the acquisition of the asset of Central Wholesale Supply, which is a specialty hardware distributor operating in one location in Richmond, Virginia. We are pleased to set our presence in this strategic market position.

In addition, we recently signed an agreement in principle for a new strategic acquisition in Canada. Together, it will generate annual sales of approximately $10 million.

I'll now go to Antoine for the financial review.

Thanks Richard. Second quarter sales reached $248.3 million, down by 11.7%, of which 6.6% growth from acquisition and 18.3% from internal decrease.

In Canada, sales amounted to $155.2 million, down by 15.2%, of which 4.1% growth from acquisition and 19.3% from internal decrease. Our sales to manufacturers reached $124.5 million, down by 18.2%.

As for the hardware retailers and renovation superstores market, sales stood at $30.8 million, down points 0.6%, of which 7.2% growth from acquisition and 7.8% from internal decrease, largely impacted by the month of April with improvement in May. In the U.S., sales totaled US$66.5 million , down 9%.

Sales to manufacturers reached $59 million, a decrease of 8.2% over the second quarter of 2019, of which 5.9% growth from acquisition and 14.1% from internal decrease. Sales in U.S.

dollars to hardware retailers and renovation superstores were down 14.8% compared to last year, including 45% growth from acquisition and 59.8% from internal decrease, resulting from higher cyclical sales last year. Excluding this effect, the internal growth in this market would have been 34%.

Total sales in the U.S. reached CAD92 million, a decrease of 5%, representing 37.5% of the total sales.

For the first half of 2020, sales totaled $497.7 million, down 1.9%, of which 6.6% growth from acquisition and 8.5% from internal decrease. In Canada, sales reached $312 million, down by $14.9 million or 4.6%, of which 5% resulted from acquisition and 9.6% from internal decrease.

Sales to manufacturers reached $252.2 million, down by $17.8 million or 6.6%, of which 4.7% growth from acquisition and 11.3% from internal decrease. Sales to hardware retailers and renovation superstores reached $59.8 million compared to $56.9 million, up 5.1%.

In the U.S., sales amounted to US$136.8 million , up by 1.2%, of which 9.6% growth from acquisition and 8.3% from internal decrease. They reached CAD185.7 million, up by 2.9% accounting for 37.3% of total sales.

Sales to manufacturers totaled US$121.8 million, an increase of $1.6 million or 1.2% over the same period last year, of which 4.3% growth from acquisition and 3% from internal decrease. Sales to hardware retailers and renovation superstores were up 1% compared to last year.

Second quarter EBITDA reached $33.8 million, down by $0.6 million or 1.7% over last year, resulting from lower sales, partially offset by cost reduction measures and government grants. Gross margin remained stable and the EBITDA margin stood at 13.6% compared to 12.2% last year.

First half EBITDA reached $58.7 million, up 6%. The gross margin remained stable.

As for the EBITDA margin, it stood at 11.8% compared to 10.9% last year, thanks to our cost control measures. Second quarter net earnings attributable to shareholders totaled $17.7 million, down 7.2%.

Net earnings per share were $0.31 basic and diluted compared to $0.33 basic and diluted last year, a decrease of 6.1%. First half net earnings attributable to shareholders reached $29.5 million, up 1.5%.

Diluted net earnings per share stood at $0.52 compared to $0.50, up 4%. Second quarter cash flow from operating activities before net change in working capital balances amounted to $26.7 million or $0.47 per share same level as last year.

Including the change in working capital balances, our operating activities generated $49.4 million during the quarter. For the first half, they were up 7.4%, totaling $47 million or $0.83 per share.

For the second quarter of 2020, financing activities used cash flow of $3.8 million compared to $10.9 million last year. This change mainly reflects the shares repurchased of $4.5 million and dividend paid to shareholders of $3.6 million in the second quarter of 2019.

No dividends were declared for the second quarter of 2020. First half financing activities used cash flow of $10.6 million compared to $17.5 million in 2019.

During the first six months, we invested $29.4 million, including $23.4 million for the three business acquisitions and $6 million primarily for the purchase of equipment to maintain and improve operational efficiency and software licenses. We continued to benefit from a healthy and solid financial position, cash balance of $42.6 million, almost no debt, a working capital of $358 million for a current ratio of 3.7:1.

I now turn it over to Richard.

Thank you, Antoine. The recovery trend that we have seen in May and June, both in the manufacturers and especially in the retailers and renovation superstores market is encouraging.

But we obviously remain very mindful on how the situation evolves in order to take appropriate action and address effectively when and as needed. We will remain focused on keeping our business model well adapted to the need of our customers, both in Canada and the U.S.

in order to meet their needs and meet their expectations. We will ensure that Richelieu value added concept based on our diversified and unique long tail approach products of distinctive multiaccess service, our outstanding online service with Richelieu.com and the strong experience of our team, supports effectively our customers in Canada and the U.S.

With a strong financial position, we are pursuing our innovation and acquisition strategies, which are the two key growth and long-term value creation drivers for the Richelieu. We're also happy to announce that this morning the board of directors approved the payment of quarterly dividends of $0.0667 per share payable on August 7.

In conclusion, I would like to warmly thank our team and business partners for their support in this challenging period. Thank you everyone.

And now we'll be happy to answer your questions.

Richard, can you comment on how the year-over-year sales comps changed over the course of Q2 and also what was the June sales comps?

The June sales, year-over-year, I think we see the result for this quarter compared to last year, but in the month of June, when we say huge improvement. First of all, the year started very strong.

Richelieu was in the way, was in a good start, an excellent year, an excellent performance regarding the percentage of EBITDA, the increase in sales and everything. So unfortunately, the COVID situation took our sales down for the last quarter.

It started with -- down by 46% in the month of April and it went back up – down to 20% in May compared to 46% in April, so a big improvement. And we've seen the retailers market basically booming since the month of May, and this is continuing in June.

Just to give you an example, for the month of June, if we, because we are two more days in June that we had last year, but if we compare for the same number of days, sales in June are higher by 4% overall with the manufacturers market, both in Canada, both markets being down by 10%, and the retailer market before -- what we call the cycle sales in Canada is up by 55%, while the same comparable sales in the U.S. are up by 80%.

So, we see a very encouraging trend. What's going to happen in the next few months, we don't know, but I think actually we're quite happy with the actual situation.

We have to keep our eyes open about what will happen in the future.

Richard, that's very helpful. And sorry what you are saying was for Q2 of this year, the whole quarter, is the sales going to be similar to a year ago?

This would be same thing. The actual quarter would be same number of days.

For the whole quarter, the third quarter...

The third quarter, it’s one additional day.

One additional day…

And Richard, could you guys disclose what was the price you're paying for Central Wholesale Supply and the other transaction that you have under agreement?

About the other, Hamir, the other transaction is, it's only a Letter of Intent that should be in a position to close a transaction in the next few weeks. So, I'm not in a position to disclose anything on this one, but for Central Wholesale we’ve paid 2 million.

And then just last one I had, on the last conference call, you had indicated that you've reduced senior management compensation in Q1 and some other headcount reductions. Have you started to maybe reverse some of those initiatives?

Clearly, the business is performing a lot better than you expected.

Like we said a few minutes ago, actually 60% of our employees were touched, you know at the -- when we made the first move in early April. Now, about 20% of our people are still touched, all the people that have reduced service, and what we’ve seen two weeks ago, the type of results that we're going to have for the second quarter.

So, I think it’s been a wise decision to reestablish the sort of 100% although that we're working five days a week and reduce salary of about 20%. So, that's what we've done in the last couple of weeks.

But we still have, as we speak actually, we still have 200 people actually on furloughs and we've got 225 employees that still work four days a week instead of five and are being paid accordingly as a matter of fact.

So, first question for you is on your EBITDA in the quarter, the strong margins. How much of that can you attribute to the government grants and how much goes to cost saving initiatives?

The government grant is 3.2 million. So, if you exclude the 3.2 million, the EBITDA would still be slightly higher than -- EBITDA percentage will still be slightly higher than last year.

And do you have visibility on how much of that 3.2 million will occur in Q3 and beyond?

Yes, we're currently evaluating the amount relating to the period, eligibility period ending June 6. It should be in the same ballpark.

You also made a reference to some postponed payments which provided a lift to cash from operations. Is that specifically the swing in accounts payable and that's what it accounts for?

Yes, you are correct. It's close to $15 million [ph].

So, some of these of these delays were up for payment on June 30. So, those are done, but we're benefiting from everything we can and that's one of the reasons why you've seen the payables increase.

So June 30, you've already caught up on that?

Yes.

And then we covered the inflections, Q3 beautiful. How's your pipeline looking going forward on M&A after the two most recent ones closed?

Yes, it's still strong in both Canada and U.S., so we're keeping our eyes open. So, this situation might also create some more opportunities.

But as we speak, we have, we still have nice files open and we are not slowing down.

And then one last one for me. There's real infection hotspots developing in the U.S.

Are you making any specific preparations for shutting down operations that they have closures there, or are you going to take it as it comes?

We are prepared for everything. We’ve now actually to operate in those circumstances, so if things get worse in such an area, we certainly will react as rapidly as we did in the past.

We've talked to our U.S. management people last week.

So far, things are rather stable. But we keep our eyes open on that, and if necessary, we’ll take the necessary action very quickly.

Hopefully, that will not result in closing some DCs.

So it's always a pleasure to talk to you guys. Do not hesitate to call us if you have any more question.

Have a beautiful day. Bye-bye.