Richelieu Hardware Ltd.

Thank you. Good afternoon, ladies and gentlemen and welcome to Richelieu conference call for the first quarter ended February 28, 2021.

With me is Antoine Auclair, 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.

We held this morning our virtual annual -- our virtual Annual General Meeting in attendance of the shareholders. We started 2021 with a strong first quarter.

All the more satisfactory since historically, the first three months are the weakest period of the year. As an essential supplier in this pandemic period, we made the challenge thanks to the strength of our customer focus business model, our dedicated team, our innovation, and value-added service strategy entering one stop shop approach, the efficiency of our website, Richelieu.com, and the fact that we serve a large base of more than 90,000 active customers in many diversified sector in the manufacturers and hardware retailers market, which is a significant asset.

We're also benefited from the contribution of our previous acquisitions and our new specialty markets. Furthermore, I would add that throughout this pandemic period, our team has made every effort to assist our clients as efficiently as possible in their projects.

All these combined, we were able to see the opportunities or favorable conditions in the Canadian and U.S. renovation market, which is our main source of growth.

Our sales increased by 19.3% consisting of a strong internal growth of 17%. Our two major markets, manufacturers and retailers, performed very well both in Canada and in the U.S.

Our sales increased by 16.2% in our manufacturers' market and by 34.5% in our retailers' market and renovation superstores. EBITDA was up 53.4%, benefiting from increased sales and lower operating costs as a result of rigorous cost controlled and diluted net earnings per share was up 76.2% over the last year.

We continue to identify acquisition targets meeting our long-term value and creation criteria. After the end of the quarter, we acquired the shares of Task Tools, a distributor of power tool accessories and related products for retailers in Canada and in the U.S., operating two centers in BC and Ontario.

Combined with Mibro acquired in 2020, this new acquisition allows us to expand our offering of this product line for the retailers and renovation superstores market in Canada and in the U.S. We also signed two agreement in principle to acquire two Canadian distributors.

Together, these three new acquisition would bring additional sales of approximately $36 million per year. In addition, we are very pleased to have added solution centers in Rochester, New York, which has become our fifth center in this strategic market.

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

Thanks Richard. First quarter sales reached $297.6 million, up by 19.3% of which 17.1% from internal growth and 2.2% from acquisitions.

Sales to manufacturers stood at $241.8 million, up by 16.3% of which 13.6% from internal growth and 2.7% from acquisitions. And the hardware, retailers, and renovation superstores market, we achieved sales of $55.8 million, up $14.3 million or 34.5%, mostly resulting from internal growth.

Those increases are the result of the favorable fallout from the strong demand in the renovation market. In Canada, sales amounted $293.2 million, up by 23.3%, of which 22.5% from internal growth and 0.8% from acquisitions.

Our sales to manufacturers reached $153.2 million, up by 20.2%, of which 19.1% from internal growth and 1.1% from acquisitions. As for the hardware, retailers and renovation superstores market, sales stood at $40 million, up 37%, all from internal growth.

In the U.S., sales grew to $81.9 million in U.S. dollar, up 16.4%; 11.8% from internal growth and 4.6% from acquisitions, reached CAD14.3 million, an increase of 13% and represented 35% of the total sales.

Sales to manufacturers reached $70 million, up by 14.1%, 8.6% from internal growth and 5.5% from acquisitions. In the hardware retailers and renovation superstores market sales grew by 31.9% entirely from internal growth.

First quarter EBITDA reached $38.2 million, up $13.3 million or 53.4% over the first quarter of 2020. Gross margin was maintained and the EBITDA margin reached 12.8% compared to 10% last year, due to the increase in sales and continued control of expenses.

First quarter net earnings attributable to shareholders totaled $21 million, up 78.3%. Diluted net earnings per share rose to $0.37 compared with $0.21 cents for the first quarter of 2020, an increase of 76.2%.

First quarter cash flow from operating activities before net change in working capital balances amounted to $30 million, or $0.53 cents per share, an increase of 48.9%. We paid dividends of 7.6 million to shareholders, representing a special dividend of $0.0667 per share and the quarterly dividend of $0.07, which is up 5% compared to last year.

We repurchased common share for $3.3 million and invested $2.9 million for new equipment to improve and maintain operational efficiency. I now turn it over to Richard.

In conclusion, more than ever, we are committed to high standards of quality and reliability in our customer service. We continue to do our utmost to support our customers and their projects as efficiently as possible.

Customer service that's currently in these difficult time is the most important element in order to maintain and gain market shares. Under the current conditions, we strictly adhere to all recommended preventive measures to protect our employees, customers and business partners as much as possible.

Currently, more than 600 employees are still working. Richelieu remains customers and innovation-oriented, where we continue to leverage our main growth drivers, namely our innovation and acquisition strategies.

This is the most appropriate way to seize and create opportunity to achieve further good performance. We are very well-prepared and organized to meet the current possible challenges such as labor shortage, getting product on time, rising shipping costs and inflation.

I take this opportunity to thank again our team and business partners for their support. Thanks everyone.

We now will be happy to answer your question.

Thanks. Hi good morning.

Richard, can you tell us how sales were year-over-year in March and how they're doing so far in April? I believe last year COVID has not impacted March sales and then they plunged in April.

Can you just tell us how maybe it's going so far?

Antoine, could you take this ball.

Yes, no problem. So, March is -- you're right, so COVID started to eat us at the at the end of March, so last week of March, but when we look at the current performance, where it's still strong.

So, on the industrial level, it's still double-digit growth and pretty much the same thing in -- on the retailer's side as well.

Actually what we do we compare ourselves with the 2019. So, we established some targeted sales, as the guideline is 2019, the same period when we established what should be our sales in the month of March.

And so actually things are doing very positive.

Okay, great. And then just in the U.S., as you know, there are areas where vaccination rates are picking up, are you seeing any changes in demand in those areas?

No, we see a constant growth in the U.S. The growth in the U.S.

is not as strong as in Canada. But the basically, we are the few earlier in the U.S.

in the last quarter that were not that strong. I mean, I can name here the Texas because of the storms, if for whatever reason, and opposite.

And we are called the other region in the U.S. where higher -- the growth was higher than 15%.

So, it is a very positive in the U.S. And we see that there and you see the trend in Canada is very clear that the market is very, very strong.

Okay, great. Thanks.

That's all I have. Thank you.

Thank you.

Good afternoon, everyone. Congrats on the great quarter.

Thank you. Good afternoon.

So, it looks like great wins in sales to retailers in the quarter. Can you tell us if there was a high proportion of cyclical sales that won't repeat in Q2?

We think that the market for the retailer will remain very, very strong in the months to come. We see that I think the consumers, they have I think some money at the bank and with the COVID situation not being better all across Canada, we see the people -- I think the trend is to be -- the people will continue to go to the hardware stores and buy some goods as well as they also buy online.

We see or regarding the other online customers that we sell to in Canada, we see our sales increasing by 49% so far this year. So, we should now hit and we feel really that the market has continued -- is going to continue to be very, very positive.

That's helpful. Thank you.

And then drilling down into the big increase in EBITDA margin in Q1, 280 basis points year-over-year. Can you give us an idea of how much was attributable to sustainable cost containment and how much was better operating leverage?

And what your views are on both of those going forward?

I think we have some cost reduction, I will let Antoine answer that, but we also -- we see actually that our product mix continue to increase as well and also our sales in the U.S. continue to increase as a result of that we see as a percentage with EBITDA margin increasing.

Antoine, maybe can you give more colors regarding the cost control.

Yes, for sure. But we're doing -- of course, Zach, with the increased volume that helps on the -- that improved the EBITDA percent, but on the cost control, we are still very rigorous around all the travel and living across North America.

So, we're still benefiting from these measures in place. And we'll take it as it comes.

But as of now, we're still benefiting from these cost reduction measures.

Understood. And then looking back over the last decade or so, Q2 margins have generally been 150 to 200 basis points stronger than Q1.

But given how strong Q1 was this year, do you still believe that seasonality will apply?

No, we should expect to see improved margin. We're talking about the same-store sales.

Of course, if we're adding acquisition that could change the mix, but for the current business that we have, we're going to work hard to improve the mix to get the synergies from the acquisition and be very rigorous on cost control, so we should see an improvement in the margin.

Absolutely. And it's gone great so far.

And then your sales stepped up 19%, but your inventory is barely moving. So, have international freight issues been causing any delays in shipments from Asia or Europe?

Are you expecting to restock?

No, we are -- we -- obviously the freight increase is pretty important. But we're working hard to get the inventory in.

So, what comes in goes out. So, you're correct, inventory increased not as much as the sales, but we're doing everything we can to serve the customers.

And then on the topic of that increase in freight costs, how's the rollout of the price hike going so far?

I just missed you -- the end of your question, Zach, sorry.

Sorry, how is the rollout of the price hike going so far?

We have already established some price increase. For the manufacturer market, it's within 24 hours, we can review our pricing.

Regarding the retailers, we have a new price increase taking effect in early May and we will keep watching the market and the inflation if it is from both increase that we have to do, we will do it later on during the year. As you mentioned, the freight is really an issue, it's more than double the cost, but as a as a percentage of the cost of our product, it's not that high.

But anyway, we keep changing or pressing as needed, whether the if needed.

Thanks. And then on your acquisitions, very quick start to the year great to see that, how active is the pipeline for the rest of the year compared to that?

We did not one complaint for the pipeline, I think the pipeline is very healthy, but also I'm very happy with the acquisition that we've made like the Task Tool business, that would be a good combination with Mibro. So that will strengthen not only our market presence for these products and that will our sales force will certainly contribute to increase the sales tremendously.

And also reinforce our management teams or in order to make sure that we continue to bring some innovation in this type of market. And the new agreement in principle that we have that are not completed yet though.

Basically, we have the same synergy with other specialized product line and specialized division that we have. So that would be a very positive.

We have very, very good fits and those acquisition combined with whatever they do, will certainly increase the sales tremendously in the future.

Yes. And the pipeline Zack, it's still healthy.

So, we have a nice files open that are -- that we are looking at. So, either in the U.S.

and in Canada, either in in the retailer's market or the industrial market as well. So, stay tuned.

Got you. Thank you.

And then on the two undisclosed acquisitions, would they be active in manufacturers market, or did they sell to retailers?

It's mainly retailers market.

Understood. Thanks.

And then one last one from me. Are you noticing any increase in acquisition target expectation, given how strong the renovation market is now?

We don't know. But actually -- okay, Antoine, let's go.

No, no, not necessarily. Probably down the line, it could happen, but as of today, we're not seeing necessarily more activity.

We have a lot of nice opportunities inward, but I don't think that it says it's COVID-related. So, we'll see.

But maybe to add -- just to add to that, Zack, I think people have told the COVID -- maybe some people as we already mentioned in other previous meetings that after the COVID, maybe some entrepreneur will decide that they had enough challenges in their life, and maybe some more business would be to sales when they're more sellable when they make some profits, so they can sell to at a higher price. Maybe we're going to see more possible acquisition.

But so far as Antoine mentioned, the pipeline is very, very healthy and we're excited about what's coming up.

Thank you very much for answering the questions. I will turn it over.

Thank you.

Hi, guys, how's it going?

Going fine.

Great. Thanks.

Good. Thanks for taking my question.

Just wanted to ask about margins here, you're talking about mix and we've talked in the past about how is a mix U.S. versus Canada, Canada having a better margin component to it.

But gradually you want to get transition to U.S. to better margin sales, over time.

Is that playing a part here too? Is the U.S.

being a driver here or is it really just overall you're seeing better mix across the Board?

It's U.S. overall as well and we see the product mix increasing as we push more and more onto higher margin products and we see more and more resolved regarding our EBITDA margin.

There is such a huge potential in the U.S. for where we have -- we hiring actually more people in order to sell more, those higher margin products.

So, that should bring some positive results. And we're very positive as well with the margins in the U.S.

that are getting closer and closer to the Canadian market. We're not there yet, but it's coming very favorably.

Yes, that's helpful. And when I think about your sales now and this mix change, is there anything that is fundamentally happening?

Is this just a result of COVID volumes? Or is there a reason why the mix changes is happening that you think is sustainable, that will still be there two, three years out?

It's a result of the fact that we are -- the effort that we invest for in order to increase the sale of these products. So, we have not started just this year, it has been started many months, and maybe a couple of years ago, mainly in the U.S., so -- and we see more and more the resolve coming in naturally.

And we're recovering new markets, for example, the close-up market. I've seen the close-up market actually, our sales increased by 46% in Canada and the U.S., you see that where you if you remember, a couple of years ago, we have invested in new business that covered this market.

So, -- and this is completely compatible with the initial product strategy. So, we see those increasing, which has been interesting.

And those markets are high margin market. So, I think that will -- that should continue on, increasing the sales for delivering products and pushing more and more to high margin products.

Yes, that's helpful. I feel like I can't remember specifically, but I'm sure this has been asked over the past few quarters.

But is there a concern that sales in the past few quarters have been a pull forward? And we're going to see not just a drop in demand from this elevated level, but a drop below the run rate we were previously at?

Or do you guys feel pretty confident that this is just increased demand and then it might come to a more normalized level later, but this is kind of still the demand that you expect going forward?

Yes, we -- I guess the certain percentage of all sales, maybe temporarily increasing. But I think overall, we see actually that Richelieu is increasing its market share, even after the COVID, we're going to see, I think better sales.

We're gaining customers and actually, we have to be very careful that we because we first serve the customer that follow they have, but we have many, many customers that we have added and some that way for us to be added. Fortunately, regarding the procurement, we have a very good team in this department and we -- I think we successful actually to get production while our competitors have much more problem than which then we have big and we if we you remember, as well as the beginning of the COVID.

We told you we have not stopped our purchasing, we have continued to push to make sure that we did not diminish our purchasing orders, and that we keep increasing our inventory. And you see actually that our inventory is about 30% higher than it was in the same period last year.

So, basically, we have made, I think, our best efforts in order to maximize our purchasing, to get the inventory and we'll continue to do that as well. Actually to make sure that for certain products where we pay in some effort to make sure that we have money for the seasonal product, for the retailers, we have we have a budget actually for rate [ph] and the additional costs caused because of the those rate are largely compensated by increased sales that you see to 35% for the retailer's for the last quarter.

So, basically, we're taking all the means that we can in order to better service the customer; the service makes all the difference. Also, our sales team actually, they keep communicating with our customers as well.

If one product is missing, they contact the customers and you propose a product that will do the same job for them. This is another big advantage of Richelieu being a one stop shop.

If you have in something like that, that we get that might be out of inventory next week. So, we called because, hey, we have this alternative product that will do exactly the same job.

So, basically, we make sure that we don't miss any opportunity, in regards of all the products that we have, and the needs of our customers.

That's great. Last question I have for you is about M&A.

Your currency is obviously improved here; your cost of capital is going down as your shares continue to rise. Does that change the way you guys think about capital allocation?

Is it possible that you could go after a bigger fish and possibly use some equity or do you still feel like it's kind of tuck-in situation that you guys have been doing for years, it's still the status quo? Just some update here would be great.

Yes, what we see in the market as we speak is more tick-in acquisition. So, if there's a larger cat -- a larger fish to catch, and it's aligned with our long-term value creation, we'll go after it, that's for sure.

But for now, what we have in the pipeline are more tuck-in acquisition that fits perfectly with our long-term strategy.

And our -- our line remains the water, just in case a big fish is interested to that line.

Sounds good. All right.

Thanks. We'll turn it over.

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

Do not hesitate to contact us if needed. Bye.

Bye. Have a good afternoon.