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Edited Transcript of BCI.TO earnings conference call or presentation 10-May-19 5:00pm GMT

Q1 2019 New Look Vision Group Inc Earnings Call

MONTREAL May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of New Look Vision Group Inc earnings conference call or presentation Friday, May 10, 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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* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

* 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 the New Look Vision Group Q1 2019 Results Conference Call. (foreign language) (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 statement included in the SEDAR filing. It applies to this conference call as well.

I will now turn the call over to Antoine Amiel, New Look Vision Group President and Chief Executive Officer, who will review the Q1 2019 final results. We will then open up for questions.

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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 am here with Tania Clarke, our CFO. Together, we're going to take you through a review of our first quarter 2019 results, after which we will take your questions.

First, some highlights for the quarter. Revenues for the first quarter were $71.5 million, up 2.4% driven mainly by comparable store sales growth. Comparable store sales increased 2.6%, our 19th consecutive quarter of comparable store sales growth achieved in spite of the weather headwinds experienced across the country from early February to mid-March. Adjusted EBITDA attributed to shareholders was just under $12 million, 3.6% higher than last year, at 16.6% operating margin, that's 20 basis points over the same period last year, making this the best Q1 on record in terms of this important metric.

EBITDA increased, carried through to the [effect] of cash flows from operating activities, up 4.4% at $11.2 million, allowing us to deleverage further. The debt-to-EBITDA ratio was 2.63 at quarter's end, down from 3.8 5 quarters ago, just after closing the Iris acquisition, thereby positioning the New Look Vision Group to resume external growth. And to date in 2019, we have acquired 8 independent stores in 3 provinces: Ontario, Québec and Newfoundland. We announced yesterday 2 agreements to pilot hearing care in our stores, one agreement for the province of Québec and another one for the rest of Canada, reflecting significant regulatory differences between the two.

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 first quarter 2019 have been filed with SEDAR, and these are also available on our website. Revenues increased 2.4% in the first quarter as a result of the following factors: comparable store sales growth of 2.6% in the quarter, sales from one new store opened in 2018 and from the acquisition of 2 independent stores during Q1 2019. The above items were partially offset by lost revenue from 6 scheduled store closures in the last 12 months.

Total operating expenses decreased 10 basis points to 85.3% of revenue in the first quarter, explained as follows: Materials consumed as a percentage of revenue increased by 40 basis points to 21.9%; Purchasing and manufacturing synergies were offset by increased outsourcing due to unscheduled machinery maintenance in our Ville Saint-Laurent lens manufacturing facility.

Employee remuneration expenses excluding equity-based compensation and other noncomparable costs as a percentage of revenue decreased by 80 basis points in the first quarter to 34.3%. The improvement reflects the impact of higher sales and the efficiencies gained from the centralization of support functions offsetting the ongoing pressure on store wages due to market conditions.

Other noncomparable costs include onetime expenses related to personnel transition costs and related matters. The increase in the quarter is principally due to the transfer of regional offices' support functions to Montréal, which is nearing its completion and is yielding cost savings.

Other operating expenses, excluding acquisition-related and other noncomparable costs, increased 30 basis points in the first quarter to 28% of revenue. The increase is a result of net increases of various operating expense [captions].

As discussed on previous calls, EBITDA, together with cash flow is the primary valuation metric in our industry. Therefore, we are reporting on adjusted EBITA attributable 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 attributed to shareholders as the result of the points just noted, Q1 2019 adjusted EBITDA rose 3.6% year-over-year to $11.9 million, representing an increase of 20 basis points to reach 16.6% of revenue.

On a diluted per share basis, the first quarter adjusted EBITDA reached $0.76, an increase of 4.1% over last year. Adjusted net earnings attributed to shareholders decreased by 8.6% to $3.9 million in the quarter. On a per share diluted basis, the quarter decreased by 7.4% or $0.25. This decrease is primarily due to an unfavorable variation in the fair value of an interest rate swap which more than offsets the higher EBITDA and lower depreciation and taxes in the quarter. Excluding the impact of the unrealized loss and related income taxes, adjusted net earnings attributed to shareholders would increase by 16.6% to $4.5 million in the quarter and on a per share diluted basis, the quarter would have increased by 16.9% to $0.29.

Net earnings attributed to shareholders decreased by 7% for the quarter to $2.1 million. As just mentioned, net earnings in this quarter are negatively impacted by the variation in the fair value of the interest rate swaps. Now turning to the company's liquidity. Cash at the end of this quarter was $5.4 million versus $11.7 million at the end of Q1 2018. The decrease is primarily a result of higher voluntary debt payments -- actually debt repayments. Although the focus of 2019 has shifted back to acquisitions and other new initiatives, the health of the balance sheet remains subject to our [debt]. Cash flows related to operating activities in the first quarter were $12.5 million, an increase of $3.8 million over last year driven by favorable changes in working capital items, which is mainly due to timing as well as higher EBITDA and lower income taxes paid.

Free cash flow is defined as operating cash flow after acquisitions of property, plant and equipment. Free cash flow increased in the quarter, mostly due to the generation of cash by working capital items and a decrease in the investment in CapEx versus the same period last year. The lower CapEx announced in this quarter was principally driven by project timing. Investment cash flows increased in the first quarter compared to the same period last year mainly as a result of lower investment in property, plant and equipment, as mentioned, driven by project timing. Financing cash flows decreased in the first quarter as well compared to last year as a result of the company's voluntary deleveraging efforts, which resulted in a decrease in total debt of $11 million.

Adjusted cash flows from operating activities are also trending positively with an increase of 4.4% over last year in this quarter. This increase is driven primarily by the higher EBITDA.

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 ongoing investments in our network's CapEx. As of March 30, 2019, $34.8 million was available for use from the company's revolving credit facility. Also, during the quarter, we continued the extension of one of the company's subordinated debts at a lower interest rate. The quarterly dividend of $0.15 per share was declared on March 9, 2019, unchanged from prior periods, for shareholders of record on June 26, 2019. The company's dividend reinvestment program is maintained as 16.6% of the dividends declared in March were reinvested in shares. Shares are issued from treasury at 95% of the weighted average trading prices for the 5 days preceding the payment date.

I will conclude by saying 2019 has begun strong, and we are progressing while maintaining a strong balance sheet. This will allow the company to continue delivering on its strategic plans. Thank you.

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

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Thank you very much, Tania. We'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Doug Cooper from Beacon Securities.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [2]

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Can you give us a bit more color on the hearing strategy? And maybe how many stores you expect this to roll out to and what the revenue model is?

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

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Good afternoon, Doug. I'm afraid I don't really want to do that and the reason is the following: We -- although hearing care in optical retail is a fairly widely spread model in Europe, we are the first North American optical chain to bring hearing into the stores -- hearing care into our existing store network. Therefore, knowing that we are closely watched by our competition and we are in an asymmetrical information world because we are public and they are not, I would rather not expand too much. If those pilots are successful, which I think they will, when we will enter into a permanent operating agreement of some kind, we will disclose more.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [4]

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Okay. You announced a -- I guess about a month ago, an acquisition of some stores in Ontario, the Darryl Sher group, that got you in there a few cities in Ontario. What's the revenue of -- the average store revenue contribution from them, what -- I mean, it got rebranded Iris, what are your -- maybe just a bit more color around those.

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

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Average type of our typical acquisition. The Darryl Sher group is an optometry group, so a perfect fit with Iris. Darryl retains some equity, so typical Iris model, joint venture store by store. So very much in the way we have modeled.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [6]

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Okay. So that will be -- will that have full contribution in the second quarter, I guess?

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

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Yes, correct.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [8]

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Okay. You've delevered quite a bit certainly over the past 4 or 5 quarters quite substantially, down, I think, $20-plus million. Is there any -- how is the pipeline specifically in Ontario? I am assuming that remains the #1 priority in terms of provinces?

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

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In theory it is, but as you know and as we've shown over the past 6 years, we go primarily where there are good targets. If they happen to be in Ontario, all the better, but we will be there for every [target]

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Operator [10]

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Your next question comes from the line of Zachary Evershed from National Bank.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [11]

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I was hoping you could give a little bit more color on the same-store sales growth. How much of that was traffic and how much was pricing?

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Antoine Amiel, New Look Vision Group Inc. - Vice Chairman, President & CEO [12]

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It was almost entirely traffic.

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

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Excellent. And you've spoken in the past, the lower same-store sales growth in Q3 and Q4 came due to low optometrist availability. You said that, that wasn't likely to repeat in 2019 but it could happen. What kind of timeline do you get visibility on that occurrence?

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

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I did not say that it would not repeat in 2019. I have no idea because we have close to 0 visibility. In our official network, optometrists are outside the [factories] and if they decide to go on holiday, we don't necessarily know at that time. They don't have an agreement on how much holiday they may take. And obviously, when they have a change in life, such as maternity leave or a long-term absence for health reasons or family reasons, that's not predictable either. The point is that doctors are really difficult to replace. So when they take leave, we're basically in difficulty. So I don't know if it will repeat in 2019. Obviously, we are doing everything we can to mitigate when it happens, but I am afraid the visibility is not very good.

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

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Understood, appreciate the color. One last one from me. You guys have been experimenting with a couple of stores with the hearing angle for a while now, and now that you've kicked off the pilot, would you say that this has anything to do with a shortage of acquisition opportunities in your traditional markets since you're looking to branch out? Or has something changed to make the opportunity more attractive recently?

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

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I think you might be mistaken. We've not been trialing audio for a while. We've not been trialing audio at all. This will be our first foray as a company into that segment. We had 2 -- we have 2 schools: one in Atlantic and one in Québec, that happen to have an audiologist practicing on premises -- careful that I'm not -- but it's purely a subrent agreement in the sense that the activity is in no way integrated into ours. So it is a true pilot, which we obviously hope will become [usage] to a permanent business model being rolled out into our stores. And absolutely, it is not for lack of acquisitions of traditional segments. I think we've shown a buoyant beginning of the year, 8 individual acquisitions closed in a quarter, and this is likely to continue for the foreseeable future.

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Operator [17]

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

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

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Thank you. A short closing remark on behalf of all of us at New Look Vision Group. We are where we wanted to be in the 7th year of our development plan. That is, stable and profitable growth, both organic and external, resuming our consolidation of the fragmented Canadian optical retail market after delevering our balance sheet faster than anticipated and launching strategic portfolio expansion in hearing care.

I thank you for dialing in and, together with Tania, we are looking forward reconnecting with you in the summer to discuss our second quarter results. Have a great afternoon.

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Operator [19]

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Thank you, ladies and gentlemen. This concludes the conference call for today. We thank you all for participating and ask you to please disconnect. Have a great day.