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Edited Transcript of BCI.TO earnings conference call or presentation 19-Mar-19 5:00pm GMT

Q4 2018 New Look Vision Group Inc Earnings Call

MONTREAL Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of New Look Vision Group Inc earnings conference call or presentation Tuesday, March 19, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antoine Amiel

New Look Vision Group Inc. - Vice Chairman, President & CEO

* Tania Melanie Clarke

New Look Vision Group Inc. - Senior VP & CFO

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Conference Call Participants

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* Martin Landry

GMP Securities L.P., Research Division - Director and Equity Research Analyst

* Zachary Evershed

National Bank Financial, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to New Look Vision Group's Q4 and Year End 2018 Results Conference Call.

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(Operator Instructions) Before we begin, let me remind you that certain statements during this conference call may constitute forward-looking information within the meaning of securities laws. For reference, please read the forward-looking statements included in the SEDAR filing. It applies to this conference as well.

I will now turn the call over to Antoine Amiel, New Look Vision Group's President and Chief Executive Officer, who will review the Q4 and year end 2018 financial results. We will then open up for questions. Thank you.

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [2]

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Good afternoon, ladies and gentlemen. Thank you for joining our quarterly call. I'm here with Tania Clarke, our CFO. Together, we're going to take you through a review of our fourth quarter and full year 2018 results, after which we will take your questions.

First, some highlights for the quarter and the full year. New Look Vision Group finished 2018 with strong earnings in the fourth quarter, contributing to a record year.

Comparable store sales were up 0.8% in the fourth quarter, our 18th consecutive quarter of comparable store sales growth. The relatively slower rate of growth is explained by lower optometrist availability mentioned during our third quarter call, which lasted into the beginning of the fourth quarter. Nevertheless, the adjusted EBITDA margin was up 80 basis points to 19.3% of revenue and up 7.3% on a per share basis.

The fourth quarter concludes a record year during which New Look Vision Group delivered on the near-term objectives set mid-2017 when we announced the Iris acquisition.

For the full year, revenues were adjustable $290 million, up 27% year-over-year and up 1.3% for comparable stores. The adjusted EBITDA attributed to shareholders reached $54.5 million or 18.7% of revenues and up 18.3% on a per share basis.

The operating margin improved 40 basis points over the prior year, arising from cost synergies. This is the third consecutive year of improved operating margin. This translated into a strong adjusted operating cash flow at $50.2 million, up 26% over the prior year, which we used to deleverage by more than 1/3 of EBITDA ahead of our target.

Last week, we further strengthened the executive team, welcoming Jean-Michel Maltais, Senior Vice President, Multichannel.

I will now turn the call over to Tania who is going to take you through our reported financials.

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Tania Melanie Clarke, New Look Vision Group Inc. - Senior VP & CFO [3]

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Thank you, Antoine, and good afternoon. Before I begin, please note that our complete financial statements and MD&A for the fourth quarter and year end 2018 have been filed with SEDAR, and these are also available on our website.

Turning now to the detailed discussion of the results. As a reminder, full year 2017 includes Iris results for 10 weeks since we acquired Iris in October 2017. Revenues increased 5.4% in the fourth quarter and 27% for the full year as a result of the following 5 key factors: the addition of revenues from the Iris acquisition; comparable store sales growth of 0.8% in the quarter and 1.3% for the full year; sales from noncomparable stores, namely the net addition of 12 stores other than Iris in 2017 broken down as follows, 11 acquisitions, 3 openings net of 2 closures. These stores were not comparable for part or all of the periods discussed today, but contributed to total revenue growth in 2018.

Sales from one new store opened in 2018 and the above factors are offset by lost revenue from 7 scheduled store closures in the year.

Total operating expenses decreased 70 basis points to 82.6% of revenue in the fourth quarter and decreased by 80 basis points to 83.3% for the full year. This improved ratio is due to the following items: materials consumed as a percentage of revenue decreased by 60 basis points to 20.9% in the quarter and decreased 20 basis points to 22% for fiscal 2018. This reflects the benefit from purchasing and manufacturing synergies gained in the quarter and over the year. Employee remuneration expenses excluding equity based compensation and other noncomparable costs as a percentage of revenue increased by 100 -- 130 basis points in the quarter to 34.5% and increased 50 basis points for the year to 33.4%. As previously discussed, the increase reflects leadership team additions; market pressures, particularly in Québec and Ontario, where the tight labor market has caused wages to increase; and the impact of rising minimum wage in certain jurisdictions, which directly impacts store wages.

Other noncomparable costs include one-time expenses related to personnel transition costs and related matters. The increase in the quarter and on a year-to-date basis is principally due to the transfer of regional offices' support functions to Montréal. This centralization will yield cost savings and efficiency gains once completed.

Other operating expenses, excluding acquisition-related and other noncomparable costs decreased 110 basis points in the fourth quarter to 26.1% of revenues, and remained flat at 26.7% for the full year. The quarterly improvement is primarily due to cost control measures at both the corporate and store level.

As discussed on previous calls, EBITDA, together with cash flow, are the primary valuation metrics in our industry. Therefore, we are reporting on adjusted EBITDA available to shareholders in order to isolate the impact of nonrecurring expenses, specifically acquisition-related costs and other noncomparable costs, and noncash expenses, which are equity based compensation and gains and losses from changes in fair value of foreign exchange contracts.

Adjusted EBITDA available to shareholders. For the factors just covered, Q4 2018 adjusted EBITDA available to shareholders rose 10.2% year-over-year to $13.8 million, representing an increase of 80 basis points to reach 19.3% of revenue. On a full year basis, adjusted EBITDA available to shareholders rose 29.7% year-over-year to $54.5 million, representing an increase of 40 basis points over 2017, and landing at 18.7% of revenue. On a diluted per share basis, the fourth quarter adjusted EBITDA available to shareholders reached $0.88, an increase of 7.3% over last year and increased by 18.3% to $3.49 for the full year.

Adjusted net earnings attributed to shareholders increased by 6.4% to $3.7 million in the quarter and for the 52-week period by 16.6% to $17.5 million. On a per share diluted basis, the quarter increased by 4.3% to $0.24, and increased 6.7% to $1.12 for the year.

Net earnings attributed to shareholders increased by 12.6% for the quarter to $3.1 million, and by 41.1% to $14.2 million for the year ended December 29, 2018. The increase in the fourth quarter is mainly due to the higher EBITDA attributed to shareholders as well as lower depreciation and taxes, partially offset by higher financing expenses.

For fiscal 2018, the key driver is again the higher EBITDA attributed to shareholders and partially offset by higher depreciation, financing expenses and income taxes.

Now turning to the company's liquidity. Cash at the end of the year was $10.6 million versus $13.6 million at the end of fiscal 2017. Cash flows related to operating activities in the fourth quarter were $7.4 million, a decrease of $1.8 million over last year, driven by the use of cash for working capital items, which is principally a result of timing related to the holiday period and higher income taxes paid. These items offset the higher EBITDA in the quarter, as discussed earlier on the call.

On a full year basis, operating cash flows increased by $2.8 million to $34.8 million or 8.7%. Free cash flow defined as operating cash flows after acquisitions of property, plant and equipment decreased in the quarter mostly due to the use of cash for working capital item and an increase in the investment in CapEx versus fiscal 2017.

For the full year, free cash flow increased by 18.5% to $26 million, and on a per share basis, increased 7.8% to $1.66 per share on a diluted basis.

Investing cash flows increased in the fourth quarter and for the 52-week period compared to the same period last year since there were no business acquisitions in 2018, higher dividends received in equity investments and the consistent investment in property, plant and equipment in the quarter and for the full year.

Financing cash flow decreased in the fourth quarter and for the fiscal year compared to the same period last year as a result of the company's deleveraging efforts, which resulted in a decrease in total debt of $12.5 million. Additionally, the company paid out more dividends in the quarter during 2018 as a whole due to a higher number of outstanding shares compared to last year and a lower dividend reinvestment rate.

Adjusted cash flows from operating activities are also trending positively, with an increase of 9.3% over last year in the quarter and 26% for the year. This increase is consistent with and primarily due to the higher EBITDA, as discussed previously.

In summary, the company's liquidity is trending positively due to the strong results in conjunction with meeting the goal of deleveraging, coupled with the continuous investment in our network CapEx.

Now turning to balance sheet highlights. We have discussed the working capital items, so we'll move to total debt. Total debt decreased by $12.5 million as a result of both mandatory and voluntary repayments since last year. The $15 million subordinated debt was renewed and will now mature in February 2024.

As of December 29, 2018, $26.7 million was available for use from the company's revolving credit facility. The quarterly dividend of $0.15 per share was declared on March 18, 2019, unchanged from prior periods, for shareholders of record on March 27, 2019. To note, the company's dividend reinvestment program is maintained and 11.7% of the dividends declared in November were reinvested in shares.

Shares are issued from treasury at 95% of the weighted average trading price for the 5 days preceding the payment date.

To conclude, 2018 results were strong. We have integrated Iris and are generating synergies group-wide. The company also maintained -- has maintained a strong balance sheet that will allow us to continue our consolidation of the fragmented Canadian optical retail market. Thank you.

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [4]

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Thank you, Tania. We'll be happy to take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from the line of Martin Landry.

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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [2]

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My first question is on the vacancy issue for the optometrist. Just want to clarify, this issue has been resolved this quarter? And I guess from what I heard in your opening remarks, Antoine, you don't expect this to linger into Q1, is that correct?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [3]

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That's correct.

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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [4]

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Okay. So safe to say that same-store sales growth is going to probably return to historical levels?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [5]

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It would be hard for us to say. But yes, the problem has been resolved, it doesn't mean it might reoccur sometime in the future. But for now, that bad spell is behind us, yes.

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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [6]

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Okay. And wondering if you can talk about your omnichannel initiatives. You hired an SVP a couple weeks ago and that will take care of that. So just if you can give us a little bit of a color on what you intend to achieve would be interesting to hear.

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [7]

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I'm not going to tell you too much because I don't think that's necessarily the forum to share that part of strategy with potential or actual competitors. But let me shed and a bit of light on what Jean-Michel Maltais will do for us. First of all, he -- that position oversees, both marketing -- the marketing group and the technology group. I'm a firm believer that those groups belong in the same head. Obviously, the mandate is to strengthen our multichannel customer journey. In the, I would say, near term, 2 specific missions in addition to the digital strategy is to finish the developments and start the deployment of some proprietary digital assets, which will give us a competitive edge. And among those are a group-wide evolution of POS as well as state-of-the-art electronic medical records. The second short-term mandate is to take our data analytics further to obviously refine our advertising and communication, both in the digital and the traditional media space. That's pretty much what I can say for now without disclosing too much to our colleague in the industry.

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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [8]

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Okay. That's helpful. And in terms of your point-of-sale systems, how many of your stores right now are automated?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [9]

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All of them. Not all of them on the same system, but we have a fairly good POS in every store. Where we see a lot of potential is to have the 375 stores operating on the exact same system.

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Martin Landry, GMP Securities L.P., Research Division - Director and Equity Research Analyst [10]

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Okay. I see, I see. All right. And then switching gears, in terms of '19, wondering how you see the outlook for new store openings. Is -- do you have a lot of locations identified, a lot of stuff in the pipeline? Or do you think it's going to be muted? Just some color on your new store openings for '19 would be super helpful.

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [11]

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As you know, we tend not to open that many greenfield for the reasons I think everybody who has followed us know, which is difficulty basically to find an optometrist, and even more difficult to find on optometrist with an existing patient base, which is absolutely necessary for a store to reach maturity. So we're very much more in favor of either acquiring an existing store or merging an existing doctor into one of our existing locations. And we see, as we've stated in the past, we see a very large number of those opportunities all across Canada.

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Operator [12]

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Your next question will come from the line of Zachary Evershed.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [13]

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With New Look poised to resume consolidation, do you have a run rate in mind for the number of stores added per quarter or per year?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [14]

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No.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [15]

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Okay. And I was hoping you could maybe give us a little color on the criteria that an acquisition would have to meet in order to be considered for acquisition?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [16]

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Okay. Criterias are kind of different whether we're talking about a single store or 2-store acquisition versus a larger target. We are looking primarily for 3 things, not in any sort of order, but 3 things. One is the retail brand. Secondly is an outstanding management team. And thirdly, a good market position. When it comes to single stores or small number of stores, we are looking primarily at the doctor and the lease. So how good the doctor is, how long he or she has been there, patient cycles and the like. And then obviously, the lease, where it is, how long it is, what are the terms and what kind of state the store is in. So those are all the factors that come into play when we are screening for targets.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [17]

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That's great color. Actually, you touched on another point, the condition of the store. What is the average condition of your store base like at the moment? And do you see a need for refurbishment in the coming years?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [18]

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We are permanently refurbishing because there are cycles. And every year, we have a set number of stores that come up for either a refresher, which is every 3, 4 years; or major renovation, which is about 8 to 9 years. It's a fairly consistent number of stores that are done every year, and we basically aim at when we see a patient, again, which is after 2.5-year cycle usually, for that patient to come into a refreshed store.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [19]

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I see. And one of your public peers mentioned that they see a short-term boost of sales after they refresh a store. Do you see a similar pattern?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [20]

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There is a boost, usually. Yes.

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Operator [21]

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Mr. Amiel, there are no further questions at this time.

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [22]

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Just a closing remark then. On behalf of all of us at New Look Vision Group, to say that we are where we wanted to be at the end of the 6-year development plan. A year ago, we discussed our anticipation for 2018 to be the pause that refreshes, meaning that we were going to focus on integration, synergies and deleveraging instead of actively seeking external growth. Iris integration has gone faster than expected, and we have further integrated our other business units. The synergies arising from those integrations fuels our cash flow, which in turn enabled us to deleverage quicker than anticipated. So drawing from our leading position in both the optometrist and optician segments as well as our renewed funding capacity, we have resumed external growth. We acquired 2 independent stores in Q1 with more to come. We endeavor to continue on our strategic path generating profitable growth from our business -- existing business units, consolidating the Canadian optical retail sector and exploring new market segments consistent with our business model.

I thank you for dialing in, and I'm looking forward reconnecting with you in the spring to discuss our first quarter results. Have a great afternoon.

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Operator [23]

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Thank you. Ladies and gentlemen, this concludes the conference call for today. We thank you all for your participation and ask that you please disconnect. Have a great day.