Richelieu Hardware Ltd. (OTCPK:RHUHF) First Quarter 2024 Results Conference Call April 11, 2024 at 3:30 PM ET
corporate participants
Richard Lord – Chief Executive Officer
Antoine Auclair – Chief Financial Officer
conference call participants
Hamir Patel – CIBC Capital Markets
Zachary Evered – National Bank
operator
Good afternoon, ladies and gentlemen, and welcome to Richelieu Hardware’s first quarter earnings conference call. At this point, all lines are in listen-only mode. Following the presentation, we will have a Q&A session with analysts only. (Operator Instructions) This call was recorded on April 11, 2024. (foreign language)
Richard Lord
Ladies and gentlemen, good afternoon. First, I must apologize for the sound of my voice. I am sick. Please, I will try my best to handle this speech. I welcome to Richelieu’s conference call regarding the first quarter ending February 29, 2024.
With me is Antoine Auclair, our Chief Financial Officer. As always, please note that some of today’s questions include forward-looking information, which is provided within the usual disclaimers reported in our financial filings.
Our fiscal year started with a strong first quarter. We continued our acquisition strategy and completed two new acquisitions, followed by a third acquisition on March 27. We achieved good sales levels comparable to the first quarter of 2023, which was substantial as sales in last year’s first quarter continued to benefit from favorable market conditions.
This result reflects the significant contribution of our acquisitions and market development initiatives, supported by our value-added services, innovation and segment diversification strategies. It should be remembered that the first quarter is always the weakest time of the year.
Regarding our margins in the first quarter, they were impacted by two primary factors. Calgary, with lower gross margins and an extended start-up period for the center in 2023.Although our inventory has decreased significantly over the past year, we There is still some inventory purchased at a higher price than current cost. The sale of these products at market prices has a negative impact on our gross profit margin. We expect this situation will be resolved as these products are reordered.
Secondly, as already announced Our distribution centers underwent expansion and modernization projects in 2023, including a new Calgary center that opened last December. The launch and development of these centers, in addition to being affected by current market conditions, has also impacted our margin decline.
We are actively working on the expansion and modernization of these centers to accelerate the launch and marketing of the neighborhood. In terms of acquisitions, we are very pleased with the three businesses we have acquired since the beginning of the year. Olympic Forest Products is a distributor of specialty lumber and panel products with a distribution center located in Erin, Ontario. Rapid Start is a specialty hardware dealer based in Rittman, Ohio Distribution Center.
On March 27, we completed the acquisition of Allegheny Plywood, a distributor of specialty sheet and collective surfacing materials with distribution centers in Pittsburgh and Allentown, Pennsylvania, and Cleveland, Ohio.
In addition to contributing approximately $60 million in annual sales, these three transactions have added new customers, complementary products and expertise, and strengthened our position in this market.
I will now turn over to Anthony for our quarterly financial review.
Antoine Auclair
Thanks, Richard.
First-quarter sales reached $407 million, up 1%, with an organic decline of 0.4% offset by a 1.4% increase from acquisitions. Sales to manufacturers were $350 million, up 1.6%, mainly from acquisitions. In the hardware, retail and decoration supermarket market, we achieved sales of US$57.3 million, a decrease of US$1.6 million and a growth of 2.7%.
In Canada, sales were $232 million, unchanged from last year. Manufacturers’ sales reached US$188 million, while sales in the hardware retailers and decoration supermarket markets were US$44.5 million, a decrease of 2%.
In the United States, sales increased to $130 million, an increase of 1.7%, of which 1.1% came from organic growth and 0.6% from acquisitions. Sales reached US$175 million, an increase of 1.6%, accounting for 43% of total sales. Sales to manufacturers reached $120 million, up 2.2%, of which 1.7% came from organic growth and 0.5% came from acquisitions. Sales in the hardware retailers and decoration supermarket markets fell by 4% compared with the same period in 2023.
First quarter EBITDA reached $40.4 million, a decrease of $8.7 million, or 17.7%, from the first quarter of 2023. Gross profit margin is low and our 2023 expansion project is in the start-up stage under current market conditions, which affects the decline in EBITDA margin. Therefore, the EBITDA margin for the quarter was 9.9%.
Net profit attributable to shareholders in the first quarter totaled $15.2 million, a decrease of 35.7%. Diluted net income per share was US$0.27, compared with US$0.40 last year. First quarter operating cash flow before net changes and non-cash working capital balances was $35 million, or $0.62 per share. Net change in non-cash working capital used cash flow of $34 million, primarily reflecting an increase in inventory and a decrease in accounts payable and accrued liabilities, while accounts receivable and other items represented a cash inflow of $1.2 million.
As a result, operating activities provided cash inflow of $0.5 million, compared with $18.8 million last year. We paid $8.4 million in dividends to shareholders and invested $15.5 million, including $7.4 million in two business acquisitions and $8.0 million in capital expenditures, including $3.5 million in expansion projects. As of the end of the quarter, the financial position was healthy, with working capital of $623.4 million and almost no debt.
I’ll hand it over to Richard now.
Richard Lord
Thank you, Antoine.
In summary, our top priority is to pursue our innovation and business acquisition strategy, develop synergies through acquisitions, control costs and develop strategic markets. We continue to leverage our strengths, our team, our value-added services and logistics tailored to our customers’ needs.
Our strong financial strength and efficient network enable us to increasingly expand our coverage in the North American market. With the ability to adapt to changing market conditions, we continue to seize and create opportunities while remaining service, innovative and results-oriented.
Thank you everyone. I’d be happy to answer your questions.
question Time
operator
(Operator Instructions) Your first question comes from Hamir Patel, CIBC Capital Markets.
Hamir Patel
Hello. Good afternoon. Richard, first quarter EBITDA margin fell below 10%. Do you think Q1 marks the trough for margins? What kind of recovery do you expect in margins in the second quarter?
Richard Lord
I can explain the decline in EBITDA margin is what we call inventory costs that are higher than current costs. This cost us $3.5 billion this season. The modernization projects we implemented in 2023 increased our expenses by $2.5 million. I think these investments are very good and will lead to a lot of sales in the future. But as we said, we’re not recovering as quickly as we expected because of the slow market. There are also increased expenses.
As you know, we have not yet begun to increase our sales prices. This should happen early in the fourth quarter, maybe in 2025. At this time, we are unable to increase pricing, for reasons you already know. But our costs have also increased. If such expenses as wages and rent are included, the additional cost would be $1.5 billion.
So basically, I think things will improve. The more time goes by, the more things will improve, and I would say primarily from the first quarter to the third quarter, we expect things to improve.
Antoine Auclair
Hamir, one factor to consider is that Q1 is always the weakest period. Typically, the second, third and fourth quarters are about two percentage points higher than the first quarter because transaction volume in the first quarter is lower than in other quarters.
Hamir Patel
OK To be fair, all else being equal, if it’s two percentage points higher, then 12% is on the low end of Q2?
Richard Lord
Yes.
Hamir Patel
fair enough. So, Richard, can you comment on March sales across the business?
Richard Lord
Yes. What we saw is that our Richelieu Cabinet Industries business declined by 3.7%. I would say the biggest decline is in residential furniture. In Eastern Canada, for example, the number of residential furnishings decreased by 15%. I think the people we call making residential furniture have it tough.
Basically, this is the toughest market we’ve ever faced. I would say we’re happy with our market, it’s still continuing to do well like middle of the road work, what we call commercial innovation. It’s 4% higher, so it’s not that bad. Office furniture fell 2%. As you know, the retail market declined by 2.7%.
operator
(Operator Instructions) Your next question comes from Zachary Evershed of National Bank.
Zachary Evershed
Thanks for answering my question, and I’m sorry to hear you’re not feeling well, Richard.
Richard Lord
I feel good. It’s just a little cold here.
Zachary Evershed
perfect. Organic growth was only slightly negative this quarter. Do you think end-market demand is recovering faster than you expected at the beginning of the year?
Antoine Auclair
This is Antoine, Zach. It’s still soft, but what you need to understand is that when we compare ourselves to the first quarter of 2023, the first quarter of 2023 equals 2022. It’s still very healthy. We think the first half is conservative, but we think the second half could be stronger than the first half.
Richard Lord
Given the market conditions that we understand, I think to achieve the sales volume that we achieved, I think is pretty good. I think our markets are doing really well in every region, and people are out there doing their jobs, selling product and promoting and whatever has to be done. We think, in this case, we think the result is very, very good.
Zachary Evershed
Thanks. Then you find that inventory costs were a $3.5 million drag during the quarter. When do you expect to be done with the remaining high-priced inventory?
Antoine Auclair
We have to re-order all products. So basically we’ve started and we think we’re going to see substantial improvement starting in season three. But unfortunately, as you understand, for financial statements, for IFRS, we have to use average cost.
So if we buy a new product, the cost is reduced by 10% compared to the previous cost, which means 10, the economy will not go directly to the growth margin because we have to consider the average cost, but basically the situation will improve .
Zachary Evershed
Then, if we look at the operating expenses associated with the expansion project, those expenses are classified as temporary expenses in your press release. Does this mean your fixed cost absorption is temporarily lower as you ramp up production, or are there specific items you won’t be paying for in the near future?
Antoine Auclair
You’re right, your first comment pretty much says that, so sure, we have some moving expenses, but the main reason is we’re in ramp mode so it’s going to take some time to absorb the fixed costs. Therefore, its impact on EBITDA for the quarter was over $2.5 million.
Zachary Evershed
And then, given your expectations for improvement in the second half of the year, and some of our forecasts of an overall decline in the U.S. repair and refurbishment market, what’s your view on current installation capacity? How many distribution centers do you have in the United States?
Richard Lord
I think the network, and all the investments that we make in the network, I think where can we capture this effect that we’re in good shape. We are in good shape in this regard.
Zachary Evershed
Thank you so much,
operator
There are no other issues at this time. I’ll turn the call back to Richard Lord for his closing remarks.
Richard Lord
No more questions. Thank you all again. If you would like to give us a call, we are always happy to chat with you. goodbye.
operator
Ladies and gentlemen, this concludes today’s conference call. Now you can disconnect the line. Thanks.
