Richelieu Hardware Ltd.

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1:04 Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu's conference call for the third quarter and nine-month period ended August thirty one, tewenty twenty one.

With me is Antoine Auclair, CFO. 01:18 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.

In line with previous period, this year we had a strong third quarter and our first nine months showed solid growth. 01:37 In Q3, sales grew to three hundred and seventy three million, twenty percent increase and EBITDA margin reached seventeen point one percent.

Our year-to-date sales were over one billion dollars and EBITDA reached one hundred and sixty three million dollars. We have made every effort to provide our customers with the most effective support, especially in this challenging environment.

02:03 Our business model is very supportive in challenging situations, we are supported by highly efficient logistics well adapted to our customer needs, our multi-channel approach and our one-stop Inter-Co Inc. North American network -- one-stops shop Inter-Co Inc.

North American network, all this provides our customers with quick and easy access to our products with our focus on maintaining right inventories and our continuous innovation strategy. We have been able to offer our customers a unique diversity of products, including many alternatives in the wide variety of product categories.

02:44 Furthermore, thanks to our website, our customers can contribute many products application according to specific needs, which is also very valuable in the circumstances. 02:56 Our manufacturers market performed very well and drove growth in the quarter with internal sales up twenty three point nine percent.

In Canada, a considerable growth of thirty five point three percent in the U.S. Meanwhile, sales to retailers and renovation superstores are now normalized to the pre-pandemic business level.

This strong performance was reflected in our EBITDA margin and net earnings and we ended the first nine months with a further strengthened financial position.

03:46 Followed by two more after to the quarter, Cook Fasteners, screw and bolt distributor operating one distribution center in Mississauga, Ontario, serving industrial markets customer. And then industrial Plywood, a panel distributor operating two centers in Reading [indiscernible] in Pennsylvania.

So far this year, we completed five acquisitions that will be adding seventy five million dollars of potential annual sales. 04:16 In addition, we have opened two additional distribution centers in the U.S.

since the beginning of the year. One in the [indiscernible], which is our fifth center in the state and during the third quarter we added one in Reading, Pennsylvania taking our network to ninety seven strategic locations.

04:39 I now turn to Antoine for the financial review for the period.

03:46 Followed by two more after to the quarter, Cook Fasteners, screw and bolt distributor operating one distribution center in Mississauga, Ontario, serving industrial markets customer. And then industrial Plywood, a panel distributor operating two centers in Reading [indiscernible] in Pennsylvania.

So far this year, we completed five acquisitions that will be adding seventy five million dollars of potential annual sales. 04:16 In addition, we have opened two additional distribution centers in the U.S.

since the beginning of the year. One in the [indiscernible], which is our fifth center in the state and during the third quarter we added one in Reading, Pennsylvania taking our network to ninety seven strategic locations.

04:39 I now turn to Antoine for the financial review for the period.

04:44 Thanks, Richard. Third quarter sales reached three hundred and seventy three point three million dollars up by twenty percent, of which, fourteen point one percent from internal growth and five point nine percent from acquisitions.

04:55 At comparable exchange rates to last year, sales increase would have been twenty three point two percent. In Canada, sales amounted to two hundred and forty six point two million, up by twenty one point three percent, of which, twelve point nine percent from internal growth and eight point four percent from acquisitions.

05:15 Our sales to manufacturers reached two hundred and five point three million dollars, up by thirty two point five percent, of which, twenty three point nine percent from internal growth and eight point six percent from acquisitions. 05:28 As for the hardware retailers, sales stood at forty point nine million dollars, down fourteen point eight percent returning to pandemic business level.

In the U.S. sales grew to one hundred and two point one million dollars in U.S.

dollars, up twenty six point seven percent, twenty five point three percent from internal growth and one point four percent from acquisitions. 05:51 Sales to manufacturers reached ninety one million in U.S.

dollar, up thirty six point seven percent -- thirty five point three percent from internal growth and one point four percent from acquisitions. The hardware retailers and renovation superstores market, sales were down twenty one point six percent.

Total sales in the U.S. reached one hundred and twenty seven point one million in Canadian dollars, an increase of seventeen point five percent and representing thirty four percent of total sales.

06:21 For the first nine months, sales reached one forty two million dollars, up twenty eight point nine percent of which twenty five point one percent from internal growth and three point eight percent from acquisitions. 06:34 In Canada, sales reached six hundred and eighty seven point five million dollars, up by one hundred and seventy two point six million dollars or thirty three point five percent, of which twenty nine percent from internal growth and four point five percent from acquisitions.

06:48 Sales to manufacturers reached five hundred and sixty two point six million dollars, up by one hundred and fifty five point one million dollars or thirty eight point one percent. Sales to hardware retailers and renovation superstores reached one hundred and twenty four point nine million dollars compared to one hundred and seven point four million dollars, up sixteen point three percent.

07:06 In the U.S. sales amounted to two hundred and eighty three point four million in U.S.

dollar, up three point four percent, of which twenty seven point six from internal growth and two point eight percent from acquisition. They reached three hundred and fifty four point eight million dollars in Canadian dollar, up by twenty point seven percent accounting for thirty four percent of total sales.

07:29 Sales to manufacturers totaled two hundred and forty seven point three million dollars, an increase of sixty three million dollars or thirty four point two percent, of which, thirty point nine percent from internal growth, and three point two percent from acquisitions. Sales to hardware retailers and renovation superstores were up nine point four percent compared to last year.

07:51 Third quarter EBITDA reached sixty three point nine million dollars up fourteen point nine million dollars or thirty point three percent over last year, resulting from significant increase in sales and continued control on expenses. Gross margin also improved and the EBITDA margins stood at seventeen point one percent compared to fifteen point eight percent last year.

08:13 For the first nine months, EBITDA reached one hundred and sixty three point one million dollars, up fifty one point three percent. As for the EBITDA margin, it's stood at fifteen point six percent compared to thirteen point three percent last year.

08:26 Third quarter net earnings attributable to shareholders totaled thirty eight point seven million dollars, up thirty five point two percent. Net earnings per share were sixty nine basic and diluted compared to fifty one basic and zero point five zero dollars diluted last year, an increase of thirty point three percent and thirty eight percent, respectively.

08:44 For the first nine months, net earnings attributable to shareholders reached ninety seven point two million dollars, up sixty seven point one percent. Diluted net earnings per share stood at one point seven two dollars compared to one point zero three dollars, up sixty seven percent.

09:01 Third quarter cash flow from operating activities before net change and non-cash working cap amounted to forty eight point six million dollars or zero point eight six dollars per share, an increase of twenty seven point seven percent, resulting primarily from the net earnings growth. 09:16 Net change in non-cash working capital used cash flow of fourteen point nine million dollars, in part due to increased inventories resulting from higher demand and to a lesser extent cost of products.

For the first nine months they were up forty seven point three percent, totaling one hundred and twenty five million dollars or two point two two dollar per share. 09:36 For the third quarter of twenty twenty one, financing activities used cash flow of seventeen point three million dollars compared to nine point two million dollars last year.

Dividends paid to shareholders of the corporation amounted to three point nine million compared to two point eight million dollars in the same period of twenty twenty. 09:55 We also repurchased common share for an amount of nine point eight million dollars.

For the first nine months, financing activities used cash flow of thirty nine point six million dollars compared to nineteen point nine in twenty twenty. Dividends paid to shareholders amounted to fifteen point five million dollars compared to seven point five last year.

In the first quarter of twenty twenty one a special dividend of six point six seven dollars per share was paid in addition to a quarterly dividend of zero point zero seven dollars per share. We also repurchase common share for a total amount of thirteen point one million dollars in the first nine months of twenty twenty one, while no share repurchased in twenty twenty.

10:33 During the third quarter, we invested thirty nine point six million dollars and fifty six point three million dollars in the first nine months, of which, forty four point two million dollars for the business acquisition and twelve point one million dollars primarily for the purchase of equipment to maintain and improve operational efficiency, as well as further investments in IT infrastructure. 10:53 We continue to benefit from a healthy and solid financial position.

Cash balance of sixty six point seven million dollars, almost no debt, a working capital of four hundred and sixteen point nine million dollars for current ratio of three point three to one and an average return on equity of twenty one point two percent. 11:12 I now turn it over to Richard.

11:13 Thank you, Antoine. In conclusion, we will continue to provide the best possible support to our North American customers by relying on our value added multichannel channel service and all these trends that have contributed to the Richelieu leadership.

As mentioned last quarter, we have ongoing expansion projects at some of our U.S. centers, such as Detroit, Dallas, Orlando, Boston, Atlanta in anticipation of future growth in the U.S.

and in other to better meet demand and probably the best service possible. 11:44 We will continue to efficiently integrate our recent acquisition while developing potential synergies.

We will cease new acquisition opportunities as long as they are constantly with our objectives, maintaining strict cost control and making ultimate use of our resources also remains a priority. We are confident that we will close this year with strong results, maintaining our successful strategies.

12:11 Thanks, everyone. We now be happy to answer your questions.

12:51 Hi. Good afternoon.

Richard, could you give us a sense as to how your sales faired in the month of September for manufacturers and retailers?

13:04 As mentioned earlier, the sales to retailers are down because they normalize -- they are getting more close to the pre-pandemic sales volume. And so which is not going to be the circumstances, which is being confirmed by the point of sales report that we have from our main customers.

Regarding the -- really the manufacturer sales are very strong. It continues to be very strong.

I think people -- what we hear from our sales force actually is that, our customer are still very busy and should continue to be busy for few quarter, because actually, some project have been postponed because of inflation, while many projects are still going on, and those projects that our postponed should take place after, let's say, more dollar pricing because we -- what we read also is that, both in Canada and U.S., the consumers have some money at the bank, and I think it's a smart way to spend their money in investing in their kitchen cabinet, the closet and the project that our customers -- the Richelieu customers can undertake.

14:12 Thanks. Very good.

That's helpful. And I wanted to ask about supply chain, I guess, in two ways.

So it sounds like you're not seeing the supply chain issues that we're seeing globally effecting demand, at least from the manufacturer side. But could you comment on how it has affected your own ability to source product?

And has that changed the mix of -- geographic mix of where you're bringing products from? And maybe if you can just remind us what that mix is today?

14:41 The good news actually is, you’ll see a -- while looking at our financial statement, our inventory is increasing. So that's good news.

That means that we can get more products coming in. And actually, I think the business -- the Richelieu business model, as mentioned at the beginning of the speech is very strong consisting of omnichannel and many ways for the customers to reach customer through the web.

15:07 A quick connection with our sales rep, which usually on the road and not on the road now, but they may be sitting at home because of the COVID, but they are answering to -- inside one minute they can answer a call, whatever the customer has punch the button on the website or give a phone call. And we also have lot of people supporting our customers over the phone.

And now all these people they are products specialists. So if a customer has one difficulties acquiring one products.

So let's say, that one product is not available, our people will suggest our customers an alternative product that will do exactly the same job, because one of their strength of relationship is to have a plan A, B, C and sometimes D in terms of all the products that we sell. So that gives many opportunity to our customers and also all our warehouses are connected together and we have a -- what we call here [indiscernible] policy actually for customers, wherever you are situated in North America, you need the product, the product is going to come from wherever the product is available to you at our own expense.

16:10 And this results in strong increase in sales and bottom line, as you can see. So we're quite proud with that strategy, and we're also quite proud of the specialized things that we have and the quick response that we can -- that we can give to our customers, whatever the question is or the problem is.

16:30 And then Richard on that note, in the past, I think you had previously sort of said twenty percent of the products come from Asia. Is that's still a good number or is that a lower number now just given some of the logistics issues.

16:42 In terms of dollar, that's a good number.

16:45 Yes. Twenty Asia, twenty Europe and sixty North America, Hamir.

16:50 Okay. Perfect.

Thanks, Antoine. And just a last question for me.

Antoine, as you start to plan for twenty twenty two, is there any larger capital projects that are worth noting?

17:05 Not as we speak. We have -- of course, we have an ongoing expansion projects like we discussed in the last quarter, but we are not talking about material investments.

So as we speak, it’s going to be mainly maintenance CapEx next year from now. If there is something else we will tell you.

17:27 Great. Thanks.

That's all I had. I'll turn over.

17:31 Thanks.

17:39 Thank you. Good afternoon.

Just looking at the EBITDA margin, very strong again this quarter. Can you just give some color maybe around the cost containment initiatives that might be contributing to that performance?

Are there any costs you anticipate to maybe come back as we hopefully continue to manage through the pandemic, things like travel? And is there any color you can give us around your margin expectations for Q4?

18:05 Yes, the main contributor for the EBITDA, Meaghen, is definitely the sales volume. So that's the main factor.

18:14 In terms of -- we're still very rigid in terms of cost control. That's for sure.

Yes, there is a certain portion of the cost cut that should come back over time, like you just said, the travel and living expenses were still very rigid on those. It will come back.

It will not come back at the same level of twenty nineteen, but it will -- some of these costs will come back. So you might see a bit of pressure on the operational expenses, but nothing major there.

And when we're going to be coming back to a pre-pandemic level, the EBITDA could be anywhere between thirteen point five percent, fourteen percent, something around that thirteen five to fourteen.

19:02 Okay, great. Thank you.

And then just looking at the inventory position. So it was a pretty sizable increase there.

Can you maybe just talk about the rationale for the magnitude of the increase? And just how you plan to manage that, assuming you continue to see sales at retail tapering off?

19:21 Yes. But with the pressure we have on the service level for sure that we were expecting the inventory to increase.

There is also the impact of the acquisitions as well. So those acquisitions doesn't come without inventory, so they increase the inventory levels.

Also the cost increase have an impact. So three major elements, volume, acquisition and cost increase.

19:47 And just to mention also that we're slowing down the purchase for the inventory for the retailers, but that only accounts for eighteen percent of our sales. And many of the product that we sell to retailers, we also sell to the manufacturing side of the business.

So that will not be very big material reduction of the inventory because of the retailers.

20:09 Thank you. That’s it from me.

20:29 Good afternoon. Thanks for taking my questions.

How long of a tail do you see on the professional market before it also pulls back to pre-pandemic levels? You mentioned a few quarters given the cost inflation we've seen postponing some projects.

Do you have a number in mind?

20:48 We ever come back to the pre-pandemic level? We don't know.

But we see Richelieu’s market share increasing. I'm quite proud to mention actually that our sales growth in Canada is twenty five percent, it’s thirty five percent in U.S.

dollar in the U.S. So that means that we're capturing more market share and we are also -- actually, we gained many new customers.

And we even refuse -- we don't refuse, let's say, that we're billing some customer actually that would like to join us, that currently would like to join us. So we have to tell them, give us some more time to establish the right level of inventory and move it back to you in three months or four months from now.

So I think the pandemic actually has been a springboard for Richelieu in order to gain new customers and increase its sales to the current customers. So this is very positive.

21:48 And with the -- we also have the acquisition as a matter of fact. But if you come back to the essence of your question, actually.

We expect the quarter -- the current quarter to be as strong as the one that you have just seen. The first quarter of next year, if you remember, well, the growth was not that outstanding in the first quarter of last year, so the [indiscernible] be strong.

After that what we should see is, I would say, the sales in dollar being at the level that we see now, plus inflation at least minimum. So that we will probably the second, the third and the fourth quarter of next year is what we expect, while the sales to our retailer should be in the same pattern that we see now to the pre pandemic lever, which is still very good numbers.

22:36 So basically, this is as far as we can see what we can explain to you.

22:42 That makes sense. Thank you.

And then your inventories ticked up, which is good. But would you say that you're having any difficulty sourcing certain products?

And is that constraining your organic growth in any areas?

22:55 We have the difficulties like anybody else, but I think we are successful. First of all, we have made -- the first decision that we made at the beginning of the pandemic is not slowdown our purchasing, neither our inventory.

So that's an advance compared to our competitors. And in spite of the difficulties to get the products on time and the extra, we have not hesitated to pay extra costs for getting the merchandise from Asia, for example, from Europe.

So we’ve paid containers up to twenty five thousand dollars and we still pay freight. I will say, most of our competitors would refuse to pay those amounts, because they will say, we kind of have a container at twelve thousand dollars, but that will delay the delivery for three months, that is why we made the decision on the spot.

Yes, we're going to pay the twenty five and the twenty thousand dollars and we're going to get the inventory earlier. So -- and those extra costs are not part of the cost of our products.

We have not increased our selling price because of those, I would say, outstanding costs or out of renewal cost for bringing the container in via freights , so we have absorbed so far this year of five million dollars which is included in our expenses and [indiscernible] inventory are not been considered for increasing our pricing because it does increase the cost of our product, because we -- well, these are decision that we've made container by container in order to make sure that we have our products as early as we can in order to satisfy our customers.

24:27 Got you. Thanks.

And then could you just compare and contrast? You have this open bar policy where no matter where it is in the country, your customers will get it and CH will absorb that cost and you have RCH absorbing the cost for higher-priced containers and airfreight as well.

But then you have these fantastic margins reported in the quarter from cost containment and higher gross margins. So how long do you think you can drive that?

24:52 As long as it is -- we have to do it, that’s our focus, we need to do it. But I don't know what will happen in the months to come, but I don't want to make any philosophy here, but what we see actually, we see -- we read the report for Lowe's and Depot as well as in the U.S.

I think their sales is all back to the pre pandemic level. So basically that should spare some containers and ship to get merchandise for other customers in North America, hopefully, that will -- that should happen and that should happen probably after the Chinese New Year regarding Asia.

25:30 Great color. Thanks.

And just one last one for me, the acquisition pipeline. How is it shaping up for the rest of the year and for twenty twenty two?

And with the Pennsylvania acquisition expanding your panel offering, do you see any major acquisition opportunities in similar markets?

25:47 Yes, It's still very healthy, so we've concluded five acquisitions this year, the pipeline is very, very interesting either in Canada, in the U.S. And the acquisition in Reading is a good one for us and, yes, it's going to open for other opportunities as well.

So we're working on very interesting opportunities.

26:16 Thank you very much. I'll turn it over.

26:19 Thank you.

26:26 Okay. If there is no more question.

Thanks again for attending. We'll be happy to talk to if you need to.

So have a nice day.