Edited Transcript of RCH.TO earnings conference call or presentation 9-Apr-20 6:30pm GMT

ST-LAURENT Apr 10, 2020 (Thomson StreetEvents) — Edited Transcript of Richelieu Hardware Ltd earnings conference call or presentation Thursday, April 9, 2020 at 6:30:00pm GMT Richelieu Hardware Ltd. – VP & CFO Richelieu Hardware Ltd. – CEO, President & Executive Director CIBC Capital Markets, Research Division – Director of Institutional […]

ST-LAURENT Apr 10, 2020 (Thomson StreetEvents) — Edited Transcript of Richelieu Hardware Ltd earnings conference call or presentation Thursday, April 9, 2020 at 6:30:00pm GMT

Richelieu Hardware Ltd. – VP & CFO

Richelieu Hardware Ltd. – CEO, President & Executive Director

CIBC Capital Markets, Research Division – Director of Institutional Equity Research and Paper & Forest Products Analyst

Connor, Clark & Lunn Investment Management Ltd. – Partner, VP, and Portfolio Manager

Good afternoon, ladies and gentlemen. And welcome to the Richelieu Hardware First Quarter Results Conference Call.

Also note that the call is being recorded on April 9, 2020.

Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [2]

(foreign language) Thank you. Good afternoon, ladies and gentlemen. And welcome to the Richelieu conference call for the first quarter ended February 29, 2020. It is to be noted that Antoine and I are attending from different locations via telephone. As usual, note that some of today’s issue include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings. In view of the current circumstances, this morning, we held our annual general meeting in attendance of the proxy holders. In accordance with strict guidelines issued by government health authorities, we respectfully ask our shareholders to refrain from attending the meeting in person. As such, our shareholders have participated by voting by proxy, and they have the possibility to ask a question using 2 options made available to them. As we mentioned in our press release, Richelieu will continue to monitor the COVID-19 situation closely and to comply with all applicable health and safety guidelines issued by our governments and authorities.

I will come back to this point after our financial review. Regarding our first quarter, ended February 29, we are very pleased with our growth of 10.2% in sales, 18.9% in EBITDA and 18.4% in net earnings attributable to shareholders. We benefited from the strong contributions of our acquisitions added to a positive internal growth in our main market segments.

We are pleased to see that our sustained innovation and acquisition strategies combined with our market development initiatives, our unique service concept and the depth of our product lines positively impacted the quarter’s performance. Furthermore, during the quarter, we made 3 new acquisitions in Canada and in the U.S. that lead our growth expansion criteria and give us access to new geographic markets, while strengthening our activities in markets where we were already present. The 3 acquisitions add approximately $60 million in sales on an annual basis as well as new customers, products and expertise. They are Decotec, acquired in this December 2019, which serves a customer base of chemical manufacturers. Mibro, also acquired in last December, which serves a customer base of retailers in Canada and in the U.S. And the last one acquired on February 3, OHARCO, which serves mainly manufacturers and operates 3 centers in Nebraska, Iowa and South Dakota, giving us access to this new geographic market. As we always do, we will create sales synergy with the new acquisition to our network, which now counts 82 centers in North America.

To conclude this overview in an effort to protect Richelieu’s current cash position and mitigate financial impact likely to result from the COVID-19 crisis, this morning, the Board of Directors have elected not to declare any dividends for the first quarter of 2020. I will now ask Antoine to go through the financial highlights of the first quarter. I will come back with additional comments. Antoine?

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [3]

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Thanks, Richard. First quarter sales reached $249.4 million, up by 10.2%, of which 3.5% from internal growth and 6.7% from acquisitions. At comparable U.S. exchange rates in 2019, sales growth would have been 10.6%. Sales to manufacturers stood at $210.5 million, up by 9.5%, 4.8% from internal growth and 4.7% from acquisitions.

In the hardware retailers and renovation superstores market, we achieved sales of $38.9 million, up by $4.9 million or 14.4%, of which 18.5% from acquisition and internal decrease of 4.1% caused by the decrease of sales to retailers in the United States.

In Canada, sales amounted to $156.7 million, up by 9%, of which 3% from internal growth and 6% from acquisitions.

Our sales to manufacturers reached $127.6 million, up by 8.4%, of which 2.2% from internal growth and 6.2% from acquisitions. As for the hardware retailers and renovation superstores market, sales stood at $29.1 million, up 11.9%, of which 3.7% from internal growth and 8.2% from acquisitions.

In the U.S., sales totaled USD 70.3 million, up 13%, 5.1% from internal growth and 8.2% from acquisition. They reached CAD 92.7 million, an increase of 12% and represented 37.2% of the total sales.

Sales to manufacturers reached USD 63 million, up by 12.1%, 9.8% from internal growth and 2.3% from acquisitions.

In the hardware retailers and renovation superstores market, sales grew by 23%, of which 61.3% from acquisition and 38.3% of internal decrease caused by higher cyclical sales and initial sales made last year.

First quarter EBITDA reached $24.9 million, up by $3.9 million or 18.9% over the first quarter of 2019.

The gross margin was maintained and the EBITDA margin improved due to increase in sales and continued control of expenses and stood at 10% compared to 9.2% same quarter last year.

Amortization expenses for the first quarter of 2020 was up $1.1 million due to the increased amortization expense resulting from our latest business acquisitions.

First quarter net earnings attributable to shareholders totaled $11.8 million, up by 18.4%. Diluted net earnings per share rose to $0.21 compared with $0.17 for the first quarter of 2019, an increase of 23.5%.

First quarter cash flow from operating activities before net change in working capital balances amounted to $20.1 million or $0.36 per share, an increase of 19.1%.

For the first quarter of 2020, dividends paid to shareholders amounted to $3.8 million, up 3.8% over 2019. We also invested $26.5 million, of which $24 million for the 3 business acquisitions mentioned earlier and $2.4 million for new equipment to improve and maintain operational efficiency. Richard?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [4]

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Thanks, Antoine. In this difficult time, our priority is to take all appropriate steps to ensure the safety of our employees, suppliers, customers, families and visitors, while continuing supporting our customers. In this regard, we make sure that we comply and exceed all guidelines from governments and authorities.

COVID-19 has a serious impact on our business. In most [geography], all operation except [3] in Québec, continue as essential services and comply with local jurisdictions. We remain active wherever appropriate and authorized and have reorganized our activities in order to focus on essential services with most of our locations still being in operation with, however, a reduced number of resources.

All locations have been operating under strict procedures intended to minimize contact between individuals and other sanitization procedures.

March sales were strong in the first half, but we started to see a decline toward the end of the month. And based on the last few days trend, our consolidated sales are negatively impacted by approximately 40%, resulting from a decline of 45% in Canada and 30% in the U.S.. More specifically, we are experiencing a decline of 75% in Québec, 30% in Ontario, 25% in Western Canada and 25% in the Atlantic provinces.

We took important and difficult measures to adjust the cost structure accordingly, including workforce reduction, reduced hours and the complete closure of 3 locations. We also reduced Board of Directors fees and my CEO remuneration by 25% and other manager by 20%. We currently have over 600 employees working from home, thanks to our IT department.

We are closing — closely and rigorously returning cash flows on the daily business. We are currently analyzing our government support program that could apply to Richelieu in the future.

More than ever, we will make sure to keep our business model well adapted to the needs of our customers in Canada and in the U.S. in order to meet their needs and anticipate their expectation, especially in these difficult market conditions.

Keep in mind that our network of 82 interconnected distribution centers, combined with our transactional website, which is also exceptional, allow us to ship from every location across North America in a very short period of time.

Richelieu’s value-added concept is still based on our diversified and unique product offering, our distinctive multi-access service, our exceptional online service with richelieu.com and the strong expertise of our team.

Our strong balance sheet and cash position will certainly help us to get through these difficult times. Thanks, everyone. We’ll now be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Hamir Patel at CIBC Capital markets.

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Hamir Patel, CIBC Capital Markets, Research Division – Director of Institutional Equity Research and Paper & Forest Products Analyst [2]

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Richard, thanks for those preliminary figures. I may have missed some of them. Could you just remind us again what you were saying your quarter-to-date aggregate sales were tracking?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [3]

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We track — actually, we track our sales in the last 5 days to make sure that we analyze the trend — the very, very current trend. As I mentioned, our sales decreased by 40%. It’s — and it’s 45% in Canada and 30% in the U.S. This is a clear [distinction]. That seems to be stable 5 days — after 5 days regarding the way that we analyze it.

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [4]

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If I can add, Hamir. Like Richard said, March started very strong. So we started to see the decline more towards the end of the month.

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [5]

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And also, it’s important to mention, if you look at our first quarter, I think we have started this year in a very, very strong manner with the sales increase and the profit increase that we’ve seen. Unfortunately, the COVID-19 is changing everything, but that was supposed to be a very strong year for Richelieu.

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Hamir Patel, CIBC Capital Markets, Research Division – Director of Institutional Equity Research and Paper & Forest Products Analyst [6]

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Okay. And Richard, are you seeing your retailers sales? How are those holding up? Because from what we’re seeing, it seems like the big box stores are actually performing a bit better than the rest of the market.

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [7]

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Yes, good question. We see a decrease of our sales by about 40% there as well. But we think that, that 40% should remain stable. So not only it’s stable, also, the accounts receivable from those accounts is really very, very safe. So basically, what we see, I think, is probably the worst, I think, the bottom of the barrel regarding the sales to other retailers. Maybe we can see some improvement in the future weeks depending on the government’s decisions.

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Hamir Patel, CIBC Capital Markets, Research Division – Director of Institutional Equity Research and Paper & Forest Products Analyst [8]

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Okay. And Richard, I appreciate the 40% figure. That’s helpful. I’m not sure if you’re able to parse out maybe how much — how that figure would vary for your residential versus commercial end markets?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [9]

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What we see, actually, it’s rather stable. It’s all the market apart touch. Well, we have many customers that also still — are still working because the — they are there for the essential services. So our customers, the repair of roofing, the repair of hospital, the repair of places that have emergency needs, you see a lot of product being sold actually for the protection of the employees in the grocery stores and the hardware stores and everywhere. So we basically sell those products. We — traditionally, we sell a lot of product that are anti — whatever the — how do you call that? The antibacterial products that are very popular, actually. It’s not big sales, but it does create some sales, and many of our customers are working on that type of projects.

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Hamir Patel, CIBC Capital Markets, Research Division – Director of Institutional Equity Research and Paper & Forest Products Analyst [10]

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And Richard, if the 40%, if we assume that, that’s largely a volume figure, are you expecting that we’ll see some product pricing deflation that could kind of add to that? Or have you seen any signs of product pricing coming off?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [11]

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No, we don’t see that actually. I think it’s also important to mention. We don’t see any price decrease in view. And we see also that we — inventory actually is healthy at Richelieu because we usually place the first quarter of the year, is a low quarter in terms of sales. So we always prepare the procurement to make sure that we have the inventory for the second quarter. So all the product needed that were forecasted for the second quarter are already in place or on the ocean, coming. So basically, we — even the inventory, I think, is important. What’s going to happen after that things last more than 2 months? We don’t know. But so far, I think it’s important to be secure with good inventory.

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Hamir Patel, CIBC Capital Markets, Research Division – Director of Institutional Equity Research and Paper & Forest Products Analyst [12]

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Okay. And Antoine, I was just wondering if you could comment on how you’re managing your receivables right now? And any data points you might have there?

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [13]

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Yes. We’re — basically, we’re managing the receivable at account per account. So we’ve — it’s clear with our credit officers that we’re not taking additional risk with credit limits. So we are involved on a daily basis, and we make sure that we monitor the accounts per accounts receivable on a region-by-region basis. So, so far, we did not see any deterioration in terms of our days sales outstanding. So it’s — we’re looking at it on a daily basis, as I said. So, so far, so good. But obviously, this is definitely a risk that we are taking very seriously and monitoring.

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Operator [14]

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The next question will be from Zack Evershed at National Bank.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [15]

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Congrats on the quarter.

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [16]

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Thanks.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [17]

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So a lot of the major questions have been asked already, but given the end market uncertainty introduced by the pandemic, what are your CapEx plans for the rest of the year?

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [18]

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Before the pandemic, it was — it would have been between $10 million and $12 million. So obviously, with everything that happens, the maintenance still needs to occur. But we’re going to review any CapEx demand. So it’s difficult to answer what it will be, Zach, but it’s going to be — for sure, it’s going to be lower than $10 million to $12 million.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [19]

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Understood. And so with CapEx trend and the dividend suspended for now, should we expect M&A activity to also be paused?

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [20]

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M&A activity will always be part of our strategy. So we’re always on the hunt.

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [21]

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We should not miss a good deal.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [22]

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I should think that due diligence on the ground might be a little bit difficult at the moment, though.

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [23]

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Sure, you’re exactly right. We are on the hunt, but closing, do deals, as of today would be obviously very difficult. But the current environment will probably bring us some more opportunities in the future as well. So we’ll see.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [24]

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Perfect. And then moving on to the hours and salary reductions. What degree are we looking at there in terms of hour reductions and then the cut in salaries?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [25]

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I can say that over 50% of our employees have been touched by either temporarily off, part-time on the reduced remuneration. So basically, I think we’ve done what has to be done. And unfortunately, these is — these are not very funny moves to make, but we do not have too much choice on that. And I think the next step also is to analyze carefully the opportunity that the government support programs can bring to us. I think Antoine and his team would be working on that next week and see what we can get from that because retaining our talents is very important. Any company works well because of its team and its good employees. So basically, we pay attention to that, and we pay attention to our people, and we’re going to see the best that we can do to retain and to make sure that when the business come back, all our talents are also back with us and happy at the same time. So — but we follow-up that very closely. Actually, we have a cash proposition, which is positive, and we will try to maintain that and do our best to — again, I repeat myself to retain our talents for the long term.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [26]

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And one last one for me. You spoke a little bit to inventory in the supply chain and [succeeding order]. But looking at the longer term, if we do see a longer duration shutdown, what kind of actions can you take to deal with international interruptions?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [27]

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We can cancel some orders. We can change our forecast. Actually, we — the inventory that is coming will come. That’s it. But before we reorder, we have to make sure that we adjust our forecast according to whatever the government will — how they will release the various activities that will take place. Basically, I think the best interest of our government when they’ve made some changes is to make sure that the small contractors and manufacturers of cabinets or whatever, are going to be back to life because actually, they are needed in the society. And if you look at — in Canada and the U.S., 80% of our customers are small manufacturers. And these guys, they need to have some work and they need to survive and they need to move forward. So hopefully, the government programs will contribute to — for them for a better start.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [28]

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That’s very helpful. And then just one for Antoine. We’re seeing what looks to be a $3.6 million lift to EBITDA from the implementation of IFRS 16. I would say that, that’s accurate, and you think that the level will stay fairly steady for Q2?

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [29]

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Yes, actually, it’s a — the impact on the EBITDA is in the amortization and also in the interest. And the total impact is $4.3 million. If you compare Q1 this year versus Q — with or before IFRS 16, so the impact is $228,000. So the total impact — the estimated total impact for 2020 of the IFRS 16 implementation is approximately $1 million on the bottom line.

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Operator [30]

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(Operator Instructions) And your next question will be from John Novak at CC&L.

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John Paul Novak, Connor, Clark & Lunn Investment Management Ltd. – Partner, VP, and Portfolio Manager [31]

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Richard, is there any risk that you now have over ordered with respect to inventories, given the sales trends you mentioned over the last week?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [32]

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Even though if that will be the case, that will not be a big problem. Actually, the only things we need is more space to — for — to start those products that will be in excess of our needs. But I don’t see that as a problem because the product that we sell, sells across North America that are needed for the customer. I don’t think we have reached the end of the world. The business will come back in one way or the other. The inventory might cost some money to us, but low-cost, warehousing products temporarily does not cost a fortune. And I think it’s safe to have that inventory. The — but the situation though will be to look after — we — what — if that thing last forever, then we hold out a big problem here. But I don’t see that as a big problem. That could be a few million dollars, let’s say, $5 million to $10 million excess of inventory, Antoine. I don’t think that could hurt us a lot in terms of cash flows. And regarding the warehousing cost, that doesn’t cost a fortune, and we don’t — and the inventory that is ordered is good inventory. These are good products that are needed by all our products in North America. And don’t forget that if we have a problem, our competitors will also have a problem. If they don’t have enough inventory, [before] and it’s important for us to have the good inventory.

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John Paul Novak, Connor, Clark & Lunn Investment Management Ltd. – Partner, VP, and Portfolio Manager [33]

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Any concern that you might — the inventory itself may be overpriced? I mean we’re seeing deflationary pressures, both in resins and in various metals. And I just wondered if you thought there could be a potential impact on margins going forward if we see these deflationary pressures in the raw materials continue?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [34]

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Yes, you’re right. That could be impacted by that. By how much? I don’t know. But again, all the industry have the same problem. I guess the next order that we’re going to place for the future quarters would be at a lower price. Yes, temporarily, our margin could be affected by product that we have paid at the right price at the time we bought it, but that if we reorder now, the same product, it should be at a lower price. Yes, that’s a risk. How much? What is the impact exactly in dollars? I don’t know. But that has a certain impact, yes.

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John Paul Novak, Connor, Clark & Lunn Investment Management Ltd. – Partner, VP, and Portfolio Manager [35]

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And I know you deal with a vast array of customers from very large to very small. Any concern in terms of bad debt, particularly with your small and medium-sized private customers?

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [36]

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Yes. I think we all have that concern. I think Antoine and his team monitor that very closely. First of all, we could say that 15% to 20% of our sales are for the retailer, that’s rather safe. We still have a lot of customers that are still active. Basically, they make good money, and they pay their bills well. And the other customer that we have are very small. I will let Antoine complete how he sees that. But the small customers, if taken individually are not big risk. But overall, though, yes, that could represent additional bad debt, we don’t know. We are very conservative. Antoine, I will let you complete that because you have all the numbers in mind.

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Antoine Auclair, Richelieu Hardware Ltd. – VP & CFO [37]

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Yes. We’re conservative on the bad debt, on the provision, certainly. But we have — like I said earlier, we monitor the accounts receivable on a daily basis. We make sure that we do not increase the risk on credit limits. We encourage the payment by credit card. So there are many things that we’re doing, and we’re monitoring with our credit team. But as of today, as we speak, we haven’t seen a deterioration of the credit. So as we speak, but it’s going to — if there is, there will probably be one. It’s going to be in the next month or so.

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [38]

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So if may complete, with the product range that we sell — actually, our customers, if they have some business or they come back in business, I think it’s good for them to pay their usual dues because they need our products. So in order to have an additional product, they would have to pay their bill. That does help. And this is what we see — that we’ve seen in the past, and that should be the case again. I think it’s a good move for our customers to pay Richelieu in order to have the inventory that they will need to continue their business.

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Operator [39]

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(Operator Instructions) And currently, Mr. Lord, we have no other questions. Please proceed.

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Richard Lord, Richelieu Hardware Ltd. – CEO, President & Executive Director [40]

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If there’s no more question. Thanks again. It’s always a pleasure to talk to you. Thank you very much for all your good questions and I wish you a good health. Stay safe until we have our next meeting for the next quarter. Thank you very much. If you need to call us, we’re there. Thank you.

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Operator [41]

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Thank you, Mr. Lord. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.

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