Richelieu Hardware Ltd. (OTCPK:RHUHF) Q4 2023 Earnings Conference Call January 18, 2024 2:30 PM ET
Company Participants
Richard Lord – CEO
Antoine Auclair – CFO
Conference Call Participants
Hamir Patel – CIBC
Zachary Evershed – National Bank Financial
Operator
Good afternoon ladies and gentlemen and welcome to Richelieu Hardware Fourth Quarter Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session, which will be restricted to analysts only. [Operator Instructions] This call is being recorded on January 18, 2024. [Foreign Language]
Richard Lord
Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu conference call for the fourth quarter and 12-month period ended November 30, 2023. 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 ended 2023 with a solid fourth quarter. Our sales are nearly in line with those of the same quarter of 2022 when the renovation market continued to benefit from favorable market conditions. Our inventory level continued to improve, helping generating over $70 million of cash flow from operating activities during the quarter.
As for the EBITDA and net earnings, these were essentially impacted by the return to pre-pandemic operating expenses and costs incurred in projects to expand and optimize several of our distribution centers, mostly in the U.S. For fiscal 2023, our total sales, including acquisitions, are also in line with those of 2022. Throughout the year, we maintained our commitment to financial discipline in order to continue generating healthy margins and strong cash flows, as shown by the $271 million generated from the operation this year.
2023 was also another good year for acquisitions complementary to our activities, as well as concrete achievements in our network, in line with our optimization culture. We invested in six new acquisitions, Unigrav, Usimm, Quincaillerie Rabel, all three in Quebec, then Trans-World Distributing in Nova Scotia, Maverick Hardware in Oregon, and Westlund Distributing in Minnesota. With this full acquisition completed in 2022, we’re adding $152 million in sales on an annual basis, as well as expanding our customer base and our offering and adding talented people to our team.
Regarding our network projects, undertaken to better seize market growth opportunities, optimize our operation and service, we are pleased with our achievements to date. We have successfully completed the expansions of our centers in Atlanta, Nashville, Fort Meyer, Pompano, and Seattle areas. Our brand new Chicago center serving the retailers market is fully operational, as are the two new centers in the Minneapolis and Carlstadt regions.
In December, we completed our Calgary expansion by concentrating the two centers into one single 250,000 square feet building. This center will become a destination for our customers, architects, and designers with a state-of-the-art showroom. In addition, we will be able to serve our retailer customers in Western Canada and our certain Alberta manufacturers from one single location.
I’d also like to add that 2023 was a strong year in terms of innovation, as we added many innovative solutions in several of our product categories, all available in our one-stop shop network and on richelieu.com for our customers. Optimizing the customer experience is always at the top of your priorities.
Antoine will now review the financial highlights of the quarter and the year, then I will conclude and we will take your questions. Antoine?
Antoine Auclair
Thanks Richard.
Our fourth quarter sales reached $454 million, slightly down by 0.8%. Sales to manufacturers stood at $393.1 million, down 1.2%, of which 2.8% from internal decrease and 1.6% from acquisition. In the hardware retailers and renovation superstores market, we achieved sales of $61 million in line with 2022.
In Canada, sales amounted to $267 million, a decrease of $6 million or 2.2%. Our sales to manufacturers reached $220 million, down 2.5%. As for retailers market, sales stood at $47 million, in line with last year.
In the U.S., sales totaled USD136 million in U.S. dollar, same as last year. Sales to manufacturers reached USD126 million in U.S. dollar, down 0.7%. In the retailers market, sales were up 8.8%. Total sales in the US reached CAD186 million in Canadian dollar, an increase of 1.2%, representing 41% of total sales.
Total sales in 2023 reached $1.8 billion, slight decrease of 0.8%, of which 1.8% from acquisition and 2.6% from internal decrease. Sales to manufacturers reached $1.5 billion, down 0.8%, of which 2.9% from internal decrease and 2.1% from acquisitions. Sales to hardware retailers were down by a 1% or $2.6 million to $248 million.
In Canada, sales totaled $1 billion, down 2.5%, of which 4.4% from internal decrease and 1.9% from acquisitions. Our sales to manufacturers amount to $856 million, down by 2.4%, of which 4.7% from internal decrease and 2.3% from acquisitions. Sales to hardware retailers and renovation superstores were $198 million, down 2.9%.
In the U.S., sales amounted to $548 million in U.S. dollar, down 2.7%, of which 4.4% from internal decrease and 1.7% from acquisitions. They reached CAD740 million in Canadian dollar, up 1.6%, accounting for 41% of total sales. Sales to manufacturers reached USD506 million in U.S. dollar, a decrease of 3%, and sales to hardware retailers were up by 1.2%.
Fourth quarter EBITDA stood at $58.8 million, compared with $76.7 million last year, down 23.3%. EBITDA margin stood at 13%. For the year, EBITDA was $230.4 million, down 19.8%, and EBITDA margin stood at 12.9%, reflecting the return to operating expense closer to pre-pandemic level, and expenses incurred specifically for projects to expand and modernize several of our distribution centers.
Fourth quarter, net earnings attributable to shareholders totaled $28.5 million, compared with $44.9 million last year. Diluted net earnings per share reached $0.51, compared with $0.80 in 2022. For the year, net earnings reached $111 million, a decrease of 33.8%, and $1.98 per share, compared to $2.99 per share last year.
Fourth quarter cash flow from operating activities before net change in non-cash working capital balances were down 20.7% to $49.3 million, or $0.88 per share. Net change in non-cash working capital balances represented a cash inflow of $23.3 million, reflecting mainly the change in inventory and accounts receivable.
Consequently, we generated $72.7 million in cash flow from operating activities, compared with $3.6 million for the fourth quarter of 2022. For the year, operating activities generated a cash inflow of $271 million. Net change in non-cash working capital balances represented a cash inflow of $80.2 million, mainly resulting from improved inventory level.
During the year, we paid dividends of $33.5 million, up 15% over 2022, of which $8.4 million in the fourth quarter, and repurchased common share for $800,000. We have thus distributed a total of $34.3 million to our shareholders this year.
We also invested $62 million during the year, of which $20 million was for business acquisitions, and $42 million mainly for equipment to maintain and improve operational efficiency, including addition resulting from expansion projects and for the purchase of a building in Drummondville, Quebec. As of November 30, 2023, net cash amounted to $24 million, compared to net bank overdraft of $112 million last year. Our working capital was $622 million, for a coverage ratio of 3.7 to 1.
I now turn it over to Richard.
Richard Lord
Thank you, Antoine.
I will now conclude with our most recent developments. On December 1 and January 15, respectively, we completed two new acquisitions. Olympic Forest, a specialty wood and parallel distributor operating at distribution centers in Erin, Ontario, and Rapid Start, a specialty hardware distributor with one distribution center in Rittman, Ohio. These two transactions, in line with our objectives, will add sales of approximately $18 million on an annual basis. We will also benefit from the expansion projects undertaken in the last two years.
Richelieu is well positioned to achieve good results in 2024. That will fit very well with our solid financial history of the last 30-years as a Tier 6 listed company. Our acquisition strategy, supported by a strong balance sheet with no debt, our innovation and value-added service have always served the company very well. We continue to execute them in the year to come.
Thanks, everyone. We’ll now be happy to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Hamir Patel from CIBC. Please go ahead.
Hamir Patel
Hi, good afternoon. Richard, could you give us a sense as to how your sales are tracking through the first six weeks of the new fiscal year?
Richard Lord
Yes, I see. What I see, the trend that we had in the last quarter of 2023 continues to be effective as we speak. We don’t see the first quarter with a positive organic growth because of the situation of the market. But we expect basically the first half to be, I would say, no growth or negative – slightly negative growth.
But we do expect, we don’t know why exactly, but we expect that the second half should be much better. This is where, after reading what’s going on in the market, we’re listening to our sales force and our people and our customers, we feel that the second quarter will be much better because the first quarter is also being impacted by some inventory left from the pandemic period where we still have about $25 million of excess inventory, which is the whole cost.
So we have to live with that for at least the next quarter and maybe the next two quarters. But basically, things are very healthy. The balance sheet is very clean. The cash flow is very clean. Our sales force is intact. What we hear from the competition is that we’re doing much better, but we cannot make a clear demonstration of that. But we feel that we’ve really continued to capture more market penetration, selling to more customers. And again, because of the new product that we have introduced and acquisitions, the pipeline is very healthy. Basically, that should be a good year for acquisition.
Hamir Patel
Okay, thanks, Richard. That’s helpful. So it sounds like, last quarter, you’d kind of pointed to the excess or higher warehousing costs being incurred for through the first half of fiscal ’24. And it sounds like you’d still expect to kind of have worked through that excess inventories by the end of Q2. Is that fair?
Antoine Auclair
Yes, that’s fair. I mean, basically, what I’m expecting is, will be flat for the first quarter, because with the Chinese New Year, we have to order in advance. So we should have a flat inventory for the first quarter. But then I’m expecting a reduction of around $25 million over the next few quarters.
Hamir Patel
Okay, great. Thanks, Antoine. And then just asking, turning to EBITDA margins, they moderated further to 13.0%. Does that mark the low of the – the sort of go forward business? Or would you expect that to continue to trend lower for another quarter or two before selecting higher again?
Antoine Auclair
Yes, I would kind of I would expect to continue to trend lower because with a volume that is slightly down, I’m expecting [technical difficulty]. So in a in a better market environment, the 13% is achievable. In a more difficult environment, I would see around 12%. So anywhere between 12% and 13%.
Hamir Patel
Okay. And for a full year ’24, Antoine, do you have a sense as to what sort of margin you would expect on a full year basis?
Antoine Auclair
Depending of the of the market condition, it’s between 12% and 13%.
Hamir Patel
Okay, fair enough. And just a last question I had, I noticed in prior years, the company tended to announce a dividend increase with the fourth quarter results. Richard, is there a reason this year the Board held off?
Richard Lord
We think that we are increasing the dividends. I don’t know how much we have increased. Last time we have increased I think was a big, big increase. So we thought that we could take it – should take it easy this year. But that doesn’t mean that we don’t forget that our dividend policy is per quarters and it’s not a yearly dividend. So basically, we can make change whenever it’s going to be needed.
Hamir Patel
Okay, fair enough. That’s all I had. I’ll turn it over. Thanks.
Operator
[Operator Instructions] Your next question comes from Zachary Evershed from National Bank Financial. Please go ahead.
Zachary Evershed
Thank you for taking my question. Hi, everybody.
Richard Lord
Hello, Zach.
Zachary Evershed
So in terms of gross margins and pressure there, is the effort to reduce inventory weighing on that or are there other factors at play?
Richard Lord
The excess inventory, as I said earlier, we still left with $25 million that should go quite fast. I would think the first two quarters we should get rid of that. Unfortunately, this is a creating some decrease of the gross margin temporarily. This is important to specify it’s temporary because basically, our margin for the product that we have paid the right price that we sell now, we sell – we have the same margin that we had before. That should come back to that.
Basically, we have to live with a little bit of some of the deflation. But as I said, it’s going to affect mainly the retail hardware stores because the product that we sell there is mainly from Asia. So basically, our cost would decrease and some of our selling price will decrease. But as a percentage, the gross margin will remain the same though.
Zachary Evershed
That’s good, color. Thank you. And you also mentioned that there were some project expenses weighing on EBITDA margins. How much was that in Q4 in dollars or basis points?
Antoine Auclair
In dollars, in Q4, you can – could estimate around for sure a $1 million in Q4.
Zachary Evershed
Perfect. Thank you. And then you mentioned that the acquisition pipeline is looking pretty good. Are seller expectations coming back down to earth after being inflated during the boom time?
Antoine Auclair
Yes, that’s a good point. So for sure that now we’re looking at we’re basing the acquisition based on 2023. So it’s going to change. It’s going to certainly change how we address these acquisitions. So, yes, it’s coming down to more reasonable prices.
Zachary Evershed
Excellent. So 2023, very eventful for projects. Should we expect more of those in 2024? Are you happy with where the network sits?
Richard Lord
No, we’re finished with this. I think all the projects that we have to do have been finished at the end of 2023. We’re in the process of finishing. We’ve finished Calgary in the month of December. In the year to come, we’re going to have in Vancouver, we’re going to have to make a change in Vancouver. But that’s not a major project, though. But we don’t have any chance because we cannot take any chance because actually we have some businesses that have doubled up in size there and with which we have to operate in two different warehouses and getting the stock back and forth from one warehouse to the other. So we have to rationalize a few things, but that’s going to be probably the only project.
Zachary Evershed
That’s perfect. Thanks. That’s it for me.
Operator
Presenters, there are no further questions at this time. I will turn the call back over to you sir for closing remarks.
Richard Lord
Okay. So thank you very much for attending this call. We will always be happy to talk to you if you decide to call us. So have a good day.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.
