Richelieu Hardware Ltd.

Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu conference call for the third quarter and first nine-month period ended August 31, 2023.

With me is Antoine Auclair, CFO. Our third quarter performance reflects the effectiveness of our initiatives to achieve good sales in our Canadian and US markets.

Sales about slightly below the third quarter of 2022, which benefited from exceptional market conditions in the pandemic context. For the nine months to date, we reached sales of CAD1.3 billion, in line with last year.

Our customer-focused business model and our diversified markets in North America are effective assets, as are our innovation and value-added service strategies and our business acquisitions, which partly offset the internal decrease in sales compared to 2022. Our EBITDA margin is lower than last year due to the return to pre-pandemic levels of operating expenses, exceptional external warehousing costs relating to temporary higher inventories level, and the costs related to our expansion and modernization projects of some centers in the US in order to accelerate future growth.

Our cash flow from operating activities was strong for the third quarter, generating CAD104 million. Our inventory is currently returning to more normal levels, which contributed to a positive effect on cash flow.

We ended the period with a financial position that remains very solid. Antoine will now review the financial highlights of the third quarter and the first nine months.

Then I will conclude and we'll take your questions.

Thanks, Richard. Third quarter sales reached CAD192.8 million, down 2.9%, of which 4.6% from internal decrease and 1.7% from acquisitions.

It's important to note that in the third quarter of 2022, Richelieu had achieved strong internal growth of 16%. In Canada, sales amounted to CAD270.1 million, down 3.4%, of which 6.4% from internal decrease, partially offset by a 2.1% positive contribution from acquisitions.

Our sales to manufacturers reached CAD219.9 million, down 3.6%. And for the hardware retailers, sales stood at CAD50.2 million, down 2.7%.

In the US, sales grew to $141.6 million, down 5.6%. Sales to manufacturers reached $131 million, down 6.8%.

In the hardware retailers and renovation superstores market, sales reached CAD10.6 million, up 12.8%. In Canadian dollar, total sales in the US reached CAD188.9 million, a decrease of 2.3%.

For the first nine months, sales reached CAD1.3 billion, down 0.8%, of which 2.8% from internal decrease and 2% from acquisition. In Canada, sales reached CAD780.6 million, down CAD20.6 million or 2.6%, of which 4.5% from internal decrease and 1.9% from acquisitions.

Sales to manufacturers reached CAD635.4 million, down CAD15.3 million or 2.4%. Sales to hardware retailers and renovation superstores reached CAD145.2 million compared to CAD150.5 million, down 3.5%.

In the US, sales amounted to $411.2 million, down 3.5%, of which 5.5% from internal decrease and 2% from acquisitions. They reached CAD553.5 million, up 1.7%, accounting for 41% of total sales.

Sales to manufacturers totaled $379.8 -- CAD379.8 million, a decrease of CAD12.6 million or 3.2%, of which 5.4% from internal decrease and 2.2% from acquisitions. Sales to hardware retailers and renovation superstores were 6 -- were down 6.5% compared to last year.

Third quarter EBITDA reached CAD61 million, down CAD18.2 million or 23% over last year, resulting from lower sales and higher operating expense. EBITDA margin stood at 13.3% compared to 16.7% last year.

For the first nine months, EBITDA reached CAD171.6 million, down 18.6%. As for the EBITDA margin, it stood at 12.9% compared to 15.7% last year.

Third quarter net earnings attributable to shareholders totaled CAD29.8 million, down [34.6%] (ph), mainly due to amortization resulting from business acquisitions and expansion projects mainly in the US, including higher interest expense on lease obligations. Net earnings per share were CAD0.53 compared to CAD0.83 last year, a decrease of 36.1%.

For the first nine months, net earnings attributable to shareholders reached CAD82.9 million, down 31.1%. Diluted net earnings per share stood at CAD1.47 compared to CAD2.19 last year.

Cash flows from operating activities before net change in non-cash working capital balances was CAD48.5 million compared to CAD60.9 million last year. Net change in non-cash working capital items represented a cash flow inflow of CAD55.1 million.

Excess inventories continue to reduce as planned, with a positive effect of CAD24.5 million. As a result, operating activities represented a cash inflow of CAD103.5 million in the quarter compared to a cash outflow of CAD2.7 million in 2022.

For the first nine months, cash flows from operating activities represented a cash inflow of CAD192 million compared to cash outflow of CAD37.9 million last year. For the third quarter, financing activities used cash flow of CAD16.9 million compared to CAD17.2 million last year.

Dividends paid to shareholders of the corporation amounted to CAD8.4 million compared to CAD7.3 million in the same period of 2022. For the first nine months, financing activities used cash flow of CAD52 million compared to CAD46.9 million in 2022.

Dividends paid to shareholders amounted to CAD25.1 million compared to CAD21.8 million last year. During the first nine months, we invested CAD42.5 million, CAD20 million for six business acquisitions and CAD22.5 million mainly for distribution center modernization and expansion projects, investments in equipment to maintain and improve operational efficiency, as well as for IT infrastructure development.

We continue to benefit from a healthy and solid financial position with a working capital of CAD606.1 million for current ratio of 3.4:1 and an average return on equity of 15.5%. I now turn it over to Richard.

Thank you, Antoine. The integration of recent acquisitions is in progress, as are the expansions and consolidation projects underway in our network.

We have finalized the consolidation of our centers in the Atlanta and Nashville regions, and our Seattle center is now fully operational. We are also progressing with the Pompano center expansion and plan to complete the consolidation of our centers in the Calgary area in the first quarter of 2024.

We expect to end the year on November 30, 2023 with a sustained performance and a solid position by relying on successful strategy that have always served us well, namely, ongoing innovation, value-added service, market penetration, and business acquisitions, which are our key growth driver. Thanks, everyone.

We'll now be happy to answer your questions.

Hi, good afternoon. Richard, can you speak to what kind of organic decline you saw in September and when you expect to return to positive organic growth?

What we see so far this year, I think, is very encouraging. If you remember well, from the 2019 to the end of 2022, our sales have increased by 70%.

The current performance is a clear demonstration, though, that we keep up with those market share that we gained during the pandemic, and we're very happy about this, and we consider our performance very satisfactory in the circumstances for the current market.

Thanks. That's helpful.

And Richard, can you speak to the M&A pipeline and whether you've seen any moderation in vendor expectations?

Yeah, the pipeline is quite healthy and -- in the US and in Canada as well. So we're working on some opportunities as we speak.

But the M&A environment is still very positive for us.

Okay, thank you. And then just with respect to your excess inventories, when do you expect to work through them and what are the risks of further price deflation as you look to normalize inventories?

Antoine will answer for the deflation. Regarding deflation, there's going to be some deflation for certain products, mainly for those that come from Asia.

But the -- as a percentage, though, our gross margin should be maintained after we have passed that -- we are through the excess of inventory. So, basically, we look forward to make sure that we stabilize the situation with new inventory at the new cost, and then we're going to see a -- growth for the margins and everything else coming in the future.

On the short term, we have to live with that situation. But I think at the end of the first half of 2024, we should be through everything.

Antoine?

Yeah. And regarding inventory, we're down CAD65 million since the beginning of the year so far.

We've mentioned that we were expecting CAD60 million to CAD80 million in 2023. It's going to be closer to CAD80 million, and we should probably see another CAD20 million somewhere in the first half of next year.

So the inventory should come to a more reasonable level in the middle of next year.

Okay, great. Thank you.

And just the last question I had was, Antoine, are you able to provide us with some perspective on what type of EBITDA margins you're targeting for 2024?

Yeah. 13 -- we're currently at 13% and with the market conditions that we're seeing now, I think that the 30% -- 13% is a reasonable level of EBITDA.

Okay, thanks. That's all I have for now.

I'll get back in the queue.

Thank you.

Hi, good afternoon. It's actually Thomas calling in for Zach.

[Technical Difficulty] consolidation of Nashville and Atlanta, and when do you expect that shows up in the results?

Yeah. We just ended the consolidation of our Atlanta and Nashville centers.

Our Seattle center is now fully operational. So we should start to see benefit from those initiatives early next year.

Okay, thank you. Do you feel the environment has stabilized enough that we can call a bottom here?

No, I think that's what -- I would say that we have visibility up to middle of next year and we see the environment staying pretty flat as it is today.

No, I think that's the right answer from Antoine, because what we see the current situation, we don't see any positive sign as to -- I don't think it's going to get worse, but we don't think it's going to get better anyways. But we -- as I explained at the beginning of the meeting, the fact that we maintain the market share that we've gained during the pandemic, I think, is a very, very -- is very positive for us.

So that means that ours -- that our sales have increased and it has been compensated by an economy, which is not as good. But our goal, though, is to continue to work hard in order to increase our market penetration and to make sure that the -- if there is a sales decline, that it's minimal, as we've seen so far.

That's really the goal of our teams, both in US and in Canada. There is a lot of work that's going to be doing in order to keep up with those market share.

Thank you. And last one for me here.

I think previously you mentioned [CAD50] (ph) million in inventory reduction next year. You just called out CAD20 million in the first half.

Is CAD50 million still the number for the full year?

Yeah. Basically, this year is going to be slightly on the high side.

So with the level of sales that we see today, CAD20 million for the first half is reasonable and I think we'll see what happens after it.

Great. Thanks so much.

If there's no more questions, thanks again. It's always a pleasure to talk to you and meet with you at your convenience.

Thank you very much, and have a nice day.