Richelieu Hardware Ltd.

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the second quarter and six month period ended May 31, 2021.

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.

We are really pleased with our second quarter. Our results show strong growth and our financial position remains sound and solid.

For comparison, it should be noted that during the same period last year, our sales were negatively impacted by a general decline in business due to the pandemic. Both in the U.S.

and in Canada, all our market segments has done very well, whether it be the kitchen cabinet manufacturers, architectural woodwork and the residential and office furniture. We are particularly proud of the solid growth in market where we recently made acquisitions and further innovation, such as door and window manufacturers, closet manufacturers and glazers.

Our hardware retailers market also showed strong growth during the quarter. Thanks to our outstanding website, our one-stop shop approach and entrepreneurial network has enabled us to make product available to our customers in a timely manner and provide alternatives when needed.

As a result, the sales increased combined with cost control as positively impacted our profit margins where we posted an EBITDA margin of 16.4% during the quarter. With the strength of our business model, the quality of our team and the ability of our organization to carefully adjust to market conditions and be proactive, we we're able to provide the best possible support to our core circumstances.

During the period, we also successfully pursued our acquisition strategy and seized good opportunities meeting our criteria of complementarity, synergy potential, long-term value growth. We completed three acquisitions in the last three months, the latest on July 5.

As mentioned previously on April 5 we acquired the shares of Task Tools, a distributor of power tool accessories and related products serving the hardware retailers market in Canada and in the U.S. We also signed two agreements in principle, one of which was completed with the acquisition of Uscan Industrial Fasteners Ltd., on June 1.

Uscan is the leading importer and distributor of screws, bolts and industrial fasteners, operating a distribution center in Montreal from which it supplies hardware retailers mainly in Eastern Canada. On July 5, we acquired 25% of the shares of Inter-Co Inc.

a distributor of Division 10 products for the construction industry in Canada and in the U.S., operating two centers in Ontario and three in the U.S., in Arizona, Ohio, and Texas. Interesting to note that this acquisition will be combined to one of our divisions already operating in this sector of activity and covering Western Canada.

In addition, we signed another agreement in principle for an acquisition in the U.S. Altogether these transaction would add sales of CAD73 million on an annual basis.

I will now go to Antoine for the financial review of the period.

Thanks, Richard. Second quarter sales reached CAD371.4 million, up 49.6% of which 46.8% from internal growth and 2.8% from acquisition.

At comparable exchange rate to last year, sales increase would have been 56%. Those increases are the result of the strong demand in the renovation market compared to last year where sales had been negatively impacted due to the slowdown in business resulting from the pandemic.

In Canada, sales amounted to CAD248.1 million, up 59.8% of which 56.7% from internal growth and 3.1% from acquisitions. Our sales to manufacturers reached CAD203.7 million, up 63.5% of which 61.7% from internal growth and 1.8% from acquisitions.

As for the hardware retailers, sales stood at CAD44.4 million, up 45.1%, 37.4% from internal growth and 7.7% from acquisitions. In the U.S., sales grew to $99.4 million, up 49.5%, 47% from internal growth and 2.5% from acquisitions.

As in Canada the renovation market in the United States has been growing strongly. Sales to manufacturers reached $87 million, up 52.6%, 50% from internal growth and 2.6% from acquisitions.

In the hardware retailers and renovation superstores market, sales grew by 20.9% mostly from internal growth. Total sales in the U.S., reached CAD123.3 million, an increase of 32.6% and representing 33.2% of total sales.

For the first half of 2021 sales totaled CAD669 million, up 34.4% of which 2.5% from acquisition and 31.9% from internal growth. In Canada, sales reached CAD441.3 million, up by CAD129.4 million or 41.5% of which 39.5% from internal growth and 2% from acquisitions.

Sales to manufacturers reached CAD357.3 million, up CAD104.8 million or 41.5%, mostly from internal growth. Sales to hardware retailers and renovation superstores reached CAD84 million compared to CAD59.4 million, up 41.4%.

In the U.S. sales amounted to $181.3 million, up 32.5% of which 28.8% from internal growth and 3.7% from acquisitions.

We reached CAD227.7 million up by 22.6% accounting for 34% of total sales. Sales to manufacturers totaled CAD156.1 million, an increase of CAD38.5 million or 32.7% of which 28.5% from internal growth and 4.2% from acquisition.

Sales to hardware retailers and renovation superstores were up 31% compared to last year. Second quarter EBITDA reached CAD61 million, up CAD27.2 million or 80.5% over last year, resulting from significant increase in sales and continued control of expenses.

Gross margin improved slightly and the EBITDA margin stood at 16.4% compared to 13.6% last year. First half EBITDA reached CAD99.1 million, up 69%.

As for the EBITDA margin, it stood at 14.8% compared to 11.8% last year. Second quarter in net earnings attributable to shareholders totaled CAD37.4 million, up 111.4%.

Net earnings per share were CAD0.67 basic and CAD0.66 diluted compared to CAD0.31 basic and diluted last year, an increase of 116.1% and 112.9% respectively. First half net earnings attributable to shareholders reached CAD58.4 million, up 98.1%.

Diluted net earnings per share stood at CAD1.03 compared to CAD0.52 last year, up 98.1%. Second quarter cash flow from operating activities before net change in working capital balances amounted to CAD46.5 million or CAD0.82 per share, an increase of 74%, compared to last year, resulting primarily from the net earnings growth.

For the first half, they were 63.2%, totaling CAD76 million or CAD1.36 per share. For the second quarter of 2021, financing activities used cash flow of CAD6.7 million compared to CAD3.8 million last year.

Dividends paid to shareholder of the corporation amounted to CAD3.9 million, while no dividend was paid in the corresponding quarter of 2020. First half financing activities used cash flow of CAD22.4 million, compared to CAD10.6 million in 2020.

Dividends paid to shareholders amounted to CAD11.6 million, compared to CAD3.8 million last year. In the first quarter of 2021, a special dividend of CAD0.06 - CAD6.67 per share was paid in addition to a quarterly dividend of CAD0.07 per share.

We also repurchased common share for an amount of CAD3.3 million in the first half of 2021, while no share repurchase in 2020. During the second quarter, we invested CAD13.9 million and CAD16.7 million in the first half of which CAD9.8 million for business acquisitions and CAD6.9 million, primarily for the purchase of equipment to maintain and improve operational efficiency, including the addition of IT licenses.

We continue to benefit from a healthy and solid financial position, cash balance of CAD89.6 million, almost no debt, working capital of CAD416.3 million for a current ratio of 3.7 to 1 and a return on average equity of 20.4%. I now turn it over to Richard.

Thank you, Antoine. In conclusion, our value-added service concept remains the cornerstone of our leadership is based on innovation and product offering, the most diversified and complete offering in our market covering the widest range of specialty product categories.

On simple and easy access to our products, whether true, our network of one-stop centers - one-stop shop centers and through our stunning world website richelieu.com. On the quality and reliability of our service and the broader range of unique sales tools in our market that we provide to our customers.

Our decision to maintain our national level at the beginning of the pandemic showed to be the right decision and our customers are still benefiting from it. We continue to do our utmost to support them.

We expect our manufacturer market continuing to be strong, to this end, in anticipation of strong future growth in the U.S. and in order to meet demand and probably the best possible service we have several expansion projects on the table for some of our U.S.

centers, notably in Detroit, Atlanta, Dallas, Boston and Orlando. In addition we'll open a new center in Pennsylvania, likely at the end of the third quarter of 2021.

As for the sales of hardware retailers market, we do not expect growth in the second half, given the exceptional sales in the last two quarters of 2020. However, compared to 2019 retailers market should be - should show a very healthy growth and should continue to be strong in the coming quarters.

We remain highly vigilant to market conditions and closely monitor prices and worldwide transportation cost increases. If necessary, selling prices will be adjusted accordingly.

We are confident in the Richelieu strength and great potential to continue to grow in the coming periods and executing its strategy in order to create long-term value. Thanks everyone.

We'll now be happy to answer your questions.

Hi, good afternoon and congratulations on strong quarter.

Thank you.

Richard, I wanted to follow-up on the point you made about retailers, I think you said you didn't expect growth, but should still be up healthy versus 2019. Obviously, clearly, it will be year-over-year down but any sort of order of magnitude on at least compared to the elevated 2020 levels, we should expect for the retailer category in the back half of the year?

Yes, I think, if you remember well in the two last quarters the sales to hardware retailers increased by something like, correct me, if I'm wrong Antoine, something like a 40%, 45%, so it could be very hard to surpass that. So we compare our sales with 20 - with 2019 which - and we expect the growth to be in the high double-digit growth still in the last two quarters compared to 2019.

Okay. No, that's very helpful and then Richard anything you could share on how June has fared for sales in the manufacturers category?

The manufacturers category is still very strong, continue about at the same pace that you've seen in the second quarter and then we expect that to continue on for, at least for a few months, because actually we see - we think there is a lot of cash in the market. The consumers have been putting out cash both in U.S.

and Canada in the last year. And also many projects have been delayed because many people that had project for innovations like kitchen cabinet or closet had to delay their project because they couldn't find a contractor to do the job.

So it's postponing some work. And I guess with the cash available in the market and the feeling that we've got from our customers because we are in constant discussion with our customers, we expect them to be very busy still for a few months.

Okay, and then Richard just coming back to the retailers market other than obviously the tough year-over-year comps. We've seen signs of the DIY segment slowing in recent months.

Have you seen something similar for your products or has there been maybe differences in terms of actual products impacts on DIY?

Yes, compared to last year, we see it - we also see that some of the retailers when we had enough stock, they have created maybe - they are buying more inventory that really needed in order to secure their business. So this is - that would be - it's also creating some delay in the future ordering.

And you're right, the consumers albeit only less now that it was - certainly less now that they were buying last year, there's no doubt about that.

So looking at the EBITDA margin are really strong performance there in the quarter. Are there any one-time benefits that you would call out here.

And as we think about the rest of this year and fiscal '22, just on an annual basis, can you maybe update your thoughts on where you see the EBITDA margin trending maybe relative to 2019?

No, Meaghen, there is no one time in there, but definitely the high volume is favorably impacting the EBITDA margin. So that's the main impact.

We're being very rigorous in terms of cost control, but the strong sales volume is benefiting the EBITDA margin, that's for sure. And as for the rest of the year, so it should continue to be high margin versus last year.

So you should - and looking at the future if you're - look if you're using the 2019 EBITDA margin, you should see improvement as well, because the 2020 EBITDA margin was not necessarily recurrent, but if you use 2019 with improvement on it, it should - you should be on target.

Okay. And just thinking about input costs and price increases, Richard, I think you touched on this a little bit.

So I think we're in a fairly unique environment here where we've seen cost rise at a rapid pace, but then, we're also seeing some relief now on the cost side. So how do you manage pricing with the customer in an environment like this.

And do you see any reluctance to purchase from customers in an environment such as this?

Not at all. Pricing, regarding the hardware products, I would say that since 2019, the price has increased by roughly close to 10% which is far from being the increases that we've seen for the lumber, for example.

So basically, in the actual situation, we keep a close - very close eye to the whatever is happening to markets for our products. So the way we manage our pricing is to protect our gross margin as a percentage.

So if we have cost increases and freight increases that we expect to continue on forever, we change our pricing immediately. As far as the manufacturers accounts, it takes 24 hours to change our request.

They except for maybe 20% of our customers that are in quotation and for the retailers usually it takes between 60 days and 90 days, which is the - which is normal with that type of customer. So basically you can be assured that our gross margin as such is very well protected.

Okay and just last question. [indiscernible] some of those global supply chain challenges.

Can you just talk about your approach to inventory management? Are you seeing any challenges there in sourcing key products and then as we see some of that slowdown take place or maybe more of a normalization with the retailers, how do you plan for that from an inventory standpoint in terms of your purchases?

In today's circumstances, as we speak, we are getting our product into the North America when it comes from Europe and Asia is a challenge. We have allocation for containers for the extra containers, because we have a lot of extra containers.

We pay a higher price. So maybe we can transfer to the selling prices, but some we don't, but whatever, we do not neglect any possibility in order to have a better service for our customers.

So we pay the high price if we have to pay to bring the containers in and we even pay air freight if necessary to maintain whatever is necessary. So basically those extra expenses are largely compensated by increased sales as you can see in our last quarter financials.

And we expect that to continue on for a few months. And I see you - actually the small decrease - the decrease that we see as we speak now with the hardware retailers, it will probably create an impact in two months, three months from now, we might have a little a bit more inventory that that would be needed.

But we don't see that as a problem. For the manufacturers though, we expect the growth that you see now to continue on for maybe not ever but for many months.

So you've got a great piece of M&A set up thus far in 2021. Can you tell me a little bit about the pipeline.

And if you think you can keep up that pace?

I will let Antoine complete my comments, but we are very proud with the acquisitions made so far, as we already discussed in the previous months, we see that more people are willing to sell their business for whatever reason. I think the pandemic is just another storm in their lives.

I think we had enough storm in their live with all the - downturn businesses that we had before and some will sell also because they have a good year. So it seems to make a profit this year.

They say okay now it's time to sell the business. So because of that we even though the multiple would be basically the same.

So we're going to pay a higher price, because they have - they do more profit this year, but that's not a problem for us, because it does not represent material differences in the price that we would have paid without the pandemic. Antoine would you add to that.

No, you're right. The pipeline is very healthy in Canada and the U.S.

on the retailers market and manufacturers market as well. So we're very busy.

We're working on nice opportunities as we speak. So you should be hearing from us in the next few months.

And we have other opportunities coming.

Great news. Thanks.

And you've really got cash burning a hole in your pocket at this point. Any plans for substantial dividend hike or more significant activity on the NCIB?

It's a very good question. We ask ourselves the same question.

We don't know - we never did something like that. And we - it's not the first time that we are in a cash position, like what we see now depending - our priority will remain.

The acquisition and Antoine would you add to that.

Definitely acquisition is the priority. We have a share buyback program in place as well.

So they are a few options to use this cash.

Great color. Thanks.

And then in terms of the expansion in the U.S., what kind of expenditure do you expect, over what timeline?

Actually the expansion that we're doing, the trial is in process now. It should be completed at the end of August.

When completed, if we don't encounter any procurement problems, whatever the racking that we need is the type of thing, we never know what's going to happen in these days. So we're going to go from 50,000 square feet to 140,000 square feet.

We used to be only 50, but we had to pay for exterior warehouses that we will have the possibility to eliminate now. Atlanta is going to go from 50 to 150.

Our management team over there with all the projects that we have are justified to us a good business plan that that will largely compensate in increased sales, the investment that would be required to entail ourselves in that warehouse and actually we have a - we are opening a new warehouse also we opening - we will be opening a new warehouse in Pennsylvania, so that we actually we service the Pennsylvania market from our New Jersey warehouse. Our New Jersey warehouse actually warehouse actually is packed to the roof, it's over capacity.

So that will give relief to New Jersey and give us opportunity to expand our sales in Pennsylvania and the other projects are Orlando and Texas is already done, we went from, I don't remember what Antoine from 40,000 square feet to 50,000 square feet - 80,000 square feet.

No. Dallas, we went from 45,000 square feet to 70,000 square feet.

So basically, this project we are working on now, and should be completed. Many of them would be completed before the end of the year.

That's great, thanks. And then just one last one for me.

We've already talked quite a bit about margins on the call. But could you help us break out how much is really torque on the higher top line and how much is a reduction in your overall central cost structure, and there's also some gross margin left in there, is that correct?

Yes, slight increase on the growth. Basically, the EBITDA margin on a normal volume would be somewhere between 12.5% and 13%.

Just wanted to ask a few questions on some mix changes that may have happened over the past little bit. I'm just kind of recalibrate if you don't mind.

So when we look at renovation versus new builds, you guys have usually been three quarters renovation, quarter new build is to impact, does that change at all, or we kind of seeing at a similar over the past several months has it's been ramped up?

That does not show change or - both the sales to hardware retailers are really related to innovation as well as the kitchen cabinet and the closet manufacturer. But we see actually more sales to the new construction, it doesn't change the percentage as such, but we see more and more higher end houses and condominium being built, and those - I was reading lately that some statistics that on the new construction, the cost for the kitchen cabinet is something like a 4%.

So if you buy a new house for CAD1 million, which is high - quiet a high end house, so the kitchen cabinet would be worth CAD40,000 minimum. While in a new construction for a house that sell for CAD200,000 both the bathroom and the kitchen cabinet will account for only 4%.

So it's $12,000$12,000. So in the CAD12,000 kitchen cabinet and bathroom and so you cannot - at this price you don't even have anything in your closet except whatever is needed to hang your clothes.

So basically, it's only CAD12,000 for that. It's very minimal.

So that does not require many products to achieve such a project. But usually in the new house even though it's a house that is worth CAD300,000 or CAD250,000, people will do renovation five years after they bought the new house, so that brings some market for the future for us as well and our customers.

All right, that's helpful. Then just thinking about your mix, you guys have talked before in the past about how some of your U.S.

business is a little more commoditized when you compare it to your Canadian business in terms of the actual products being sold. And you guys mentioned the goal being to try to change that.

The attitude in the U.S. to want more premium product.

Is that been also playing a part here?

You see we are moving forward actually. Our product mix in the U.S.

continued to improve and it's actually, the EBITDA margin in the U.S., is not very far from the one that we have in Canada. And so basically our exclusive product as we already said that 60% of the product that we sell are either exclusive or Richelieu brand name products and we see all those products actually being very attractive for the U.S.

market. Richelieu is becoming more and more well-known and also I think the COVID situation has also made it - was a springboard for Richelieu to attract new customers, new house for people that were not contacting us before.

So basically, I think the investment that we've made in the U.S. are going to open the growth - more important growth in the future that we've seen in the past.

Yeah, that's actually a good segue into the next question on when you think about the U.S., you look for - even Canada as well, but looking at market share versus just torque in general, how would you guys break down your growth in the past few strong quarters in terms of actually winning market share versus general market growth. Obviously you don't need give numbers but just kind of general ideas?

I would say it is 80% market growth and 20% in new market penetration.

Last question I have for you is just on, I want to pin a scenario for you and I'm curious if you kind of give me some guidance. If I - I just want to think about the operating leverage within your business just given the gross margin, if you kind of - if you were able to double your business over the next five years in terms of top line, similar gross margin profile.

So, the products are very similar to the mix you have right now. Where do you think your actual EBITDA margin could go from here?

Is it kind of top out close to 20% or if you even triple your business from here, could you actually see your margin getting up higher to that like 30% margin or do you think being below 20% is kind of, that's really where you're because it's a capital-light business is kind of where you probably going to max out at? I'm just curious if you could provide any kind of clarity on where the potential margin profile of the business really is?

Just seeing like this quarter seen such a big jump in margin. I'm just trying to understand how much of that is really available as you guys continue to grow over the next five to 10 years?

If we continue to grow there is no doubt that our EBITDA margin will continue to grow as well. Will that reach 20% that will be a dream.

It's like, if you were being following us - putting up on us since a few years, I keep seeing the investors, my dream is to reach 20% return on the - called that Antoine on - as you announced a few minutes ago.

The average - the return on average equity.

Average equity. So basically, I think it is an amazing number and I think EBITDA margin - I think if we dream of increasing our sales depending on the type of investment and expand other expenses that would be needed to achieve it.

I think yes, the EBITDA margin should be - could be close to 15%. I don't know it is hard to tell that, because let's say if we don't do anything, we just increase our sales not making any further investment as we are now, we certainly reach 20%, yes, no doubt, but to get that CAD1 million additional sale, we certainly require extra expenses and acquisition with lower EBITDA margin that will dilute the actual EBITDA margin that we are achieving, that type of thing, but we all dreaming that our dreams altogether is to increase that EBITDA margin.

Yes. No doubts.

I mean obviously you guys have been around for a while, you guys have an excellent track record, but you're still relatively small. So I'm just, I'm kind of assuming that there is still quite a runway, lack of acquisitions and internal growth, just in general.

So I'm just trying to size up what the a lot of companies just seems like they can have margin expansion forever, but at one point its got to stop. And I'm just wondering where that stop is for you guys and what your real level of - where could it really go from here?

So it sounds like you're saying 20% is high. And so, but you can see it, you guys get to more 15% realistically over the next little bit, if you kind of continue to grow and directionally you have been.

Is that the way I should interpret it?

Does that makes sense Antoine?

Yes, if you look historically, the highest that we have reached historically is 14.5%. So we were in that area at some point.

So...

Was that pre-IFRS 16 or is that including...

Pre-IFRS, yes, pre-IFRS 16.

And that would have been before expanding heavily in the U.S. and then doing all the - I know you guys have done a lot of - well, I don't know if you want to call it but expansions of your warehouses that have created some headwinds on margin.

You're exactly right. So that's prior to the accelerated growth in the U.S., but now as you can see the EBITDA margin is improving year after year.

So it all depends of the kind of investment we're making with acquisition for example but same-store sales, the EBITDA margin is always increasing.

Perfect. That's really helpful.

Appreciate it. Thanks guys.

Thank you.

Thank you to all of you. There is no more.

So we will always be happy to meet you - talk to you over the phone if you need more - if you have more questions. Thank you very much and have a very nice day.