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Edited Transcript of BCI.TO earnings conference call or presentation 13-May-20 4:00pm GMT

Q1 2020 New Look Vision Group Inc Earnings Call

MONTREAL Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of New Look Vision Group Inc earnings conference call or presentation Wednesday, May 13, 2020 at 4:00:00pm 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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* Zachary Evershed

National Bank Financial, Inc., Research Division - Analyst

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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 Q1 2020 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 security laws. For reference, please read the forward-looking statement included in the SEDAR filings. It applies to this conference call 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 Q1 2020 financial results. We'll 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. This is Antoine speaking. Thank you for joining our quarterly call. I hope all of you and your loved ones are well in health and spirit. I'm on the line with Tania Clarke, our CFO. Together, we're going to take you through a review of our first quarter 2020 results.

Before handing the call over to Tania for the financial review, I'm going to explain the New Look Vision's posture from the COVID-19 crisis outset to the early stages of reopening our stores. We will be happy to take your questions at the end.

First, some highlights. The first quarter is very much a tale of 2 periods. Up until the first week of March, we were on track to deliver our 23rd consecutive quarter of comparable store sales growth. Carrying over the momentum we gathered in the last quarter of 2019, our sales rose 2.2% on a comparable basis. However, as safety concerns mounted early March, we reorganized to protect the company and the early cash conservation measures among which expense reductions have paid off. And we've been able to secure the liquidity and financial flexibility to weather an extended storm and have the might we need to resume growth thereafter.

Specifically about COVID-19. New Look Vision responded swiftly to the crisis along 3 principles: participation, protection and responsibility. Participation in stemming the pandemic spread by closing a large number of locations early on, our stores as well as our offices, factories and distribution centers.

Protection for our employees with a supplemental pay package for those placed on temporary leaves. Protection of our financial autonomy with immediate cash burn optimization, expense control, CapEx -- capital expenditure postponements, dividend suspension, executive pay reduction and also expansion of our available funding from our lenders.

And responsibility, as eye care professionals, to keep open a minimum number of stores to serve those in urgent need of eye care and eyewear. The company launched the Guardian Angel program on March 25, giving hospital personnel the opportunity to replace broken eyewear quickly. We also retooled our central lens processing facility to manufacture safety eyewear for use in health care facilities. Throughout the shutdown, our teams have continued to work on strategic growth projects, both internal and external.

The gradual store reopening has started -- started on May 4 in certain areas served by our network. It is expected to rollout across all banners in coming weeks in accordance with local and professional regulations. Ahead of reopening, the company issued stringent health and safety procedures, undertook extensive training in the form of in-store rehearsals and is providing each location with prescribed personal protective equipment.

A very special word of gratitude are warranted for the New Look Vision's people, their discipline, their fortitude, their resilience and initiated effort for confinement

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, everybody. Before I begin, please note that our complete financial statements and MD&A for the first quarter 2020 have been filed with SEDAR and are also available on our website. This quarter, the company adopted IFRS 16 leases. The filed MD&A presents our Q1 2020 results with and without the impact of the standard. This standard was applied on a modified prospective basis, which means that the operating results of previous fiscal periods have not been restated.

The impact is that the company's financial results in the first quarter of 2020 are impacted by occupancy-related expenses previously recorded under the caption other operating expenses are now recorded through depreciation of the right-of-use assets and interest expense tied to the corresponding liabilities, now recorded on our balance sheet.

The following Q1 2020 review will be presented excluding the impact of IFRS 16. Revenues decreased 4.8% in the first quarter in spite of the comparable sales growth of 2.1% at the end of February 2020, overcoming the impact of weather -- harsh weather issues negatively hitting the eastern region in the early part of the quarter. The decrease in revenue is a result of the slowdown in revenues in early March due to the anticipation of the pandemic, and then the eventual temporary closure of approximately 80% of our stores from mid-March onward coupled with the remaining stores offering emergency services at reduced store hours. These impacts are offset by the revenues generated from the acquisition of 25 stores in the last 12 months, partially offset by revenues lost from 5 scheduled closures.

Total operating expenses, excluding the impact of IFRS 16, increased by 140 basis points to 86.7% of revenues. The temporary closure of approximately 80% of our physical locations from mid-March onwards, as expected, impacted our key metrics as follows. As a percentage of revenue, materials consumed increased by 110 basis points to 23% in the quarter due to a change in product mix towards less profitable products such as contact lenses, tied to the temporary store closures and newly acquired businesses operating at higher cost ratios.

Employee remuneration expenses, excluding equity-based compensation and other noncomparable items, as a percentage of revenue, increased by 20 basis points in the quarter to 34.5% of revenue. This deterioration of the ratio is primarily driven -- is driven primarily by the temporary store closures, the acquisition of new businesses operating at higher cost ratio and the previously disclosed investments in the management team, partially offset by the application of the government wage subsidies and efficiencies gained from the centralization of certain support functions on a comparable basis. Other noncomparable items include onetime expenses and gains connected with personnel costs related to acquisition, restructuring and transition-related matters.

Excluding the impact of IFRS 16, other operating expenses, excluding acquisition-related and other noncomparable items, increased by 20 basis points in the first quarter to 28.2% from 28% of revenue for the same period last year due to the decline in the revenues at the end of the quarter and newly acquired businesses operating at higher cost ratios, which offset realized cost reductions in the quarter.

Now taking into consideration the impact of the application of IFRS 16, total operating expenses decreased 660 basis points to 78.7% of revenue in the first quarter, principally as a result of the adoption of IFRS 16 and the reclassification of occupancy cost to depreciation and financing expenses. In response to the COVID-19 shutdown, the company adopted aggressive cost-saving measures such as temporary layoffs, executive salary reductions and general expense rationalization. The impact of these measures will mainly be realized in Q2.

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

So as a result of the factors just covered, excluding, once again, the impact of IFRS 16, adjusted EBITDA attributed to shareholders decreased by 16.3% to $10 million and dropped 200 basis points to 14.6% from 16.6% of revenue, principally driven by the temporary store closures. On a per share diluted basis, the decrease is 15.8% to arrive at $0.64.

Depreciation expense increased by $4.9 million to $9.3 million for the first quarter. The main factor of this increase is the recording of $4.7 million related to the depreciation on the right-of-use assets recorded under IFRS 16. The balance of the increase is the result of acquisitions and higher capital investments made in 2019 versus 2018.

Financial expenses increased $2.4 million or 73.8% to $5.6 million compared to the same period last year. The increase is driven by 2 factors. Firstly, $1.4 million tied to the adoption of IFRS 16 with the recording of interest expense on the lease liability. Secondly, $1.3 million due to an unfavorable fair value change in the interest rate swap as a result of current market forecasts of future interest rates linked to COVID-19 impact. Actual interest on long-term debt was $0.3 million lower than the same period last year as a result of negotiations in 2019.

Excluding the impact of IFRS 16, adjusted net earnings attributed to shareholders decreased 50.6% to $1.9 million, and on a per share diluted basis, decreased 52% to $0.12. Excluding the impact of IFRS 16, net earnings attributed to shareholders decreased 91.1% to $0.2 million. The decrease as described our captions related to the temporary store closure mid-March.

During this COVID period, cash preservation is the main goal, tied closely with the strengthening of the balance sheet. Cash at quarter end was $10.9 million versus $5.4 million at the end of 2019. Cash was impacted by the acquisitions and investments completed since the beginning of the year, which were offset by increased cash flows related to operating activities.

In the first quarter, excluding the impact of IFRS 16, operating cash flows increased 36% to $8 million. This increase, once again, is related principally to the store closures as a result of COVID-19 shutdown.

Excluding the impact of IFRS 16, free cash flow decreased 56.5% to $4.5 million as a result of lower operating cash flows and higher CapEx in the quarter. To note, future CapEx investments have been reduced as part of our COVID-19 measures.

Investing cash flows decreased in the first quarter mostly related to the acquisition activity that was resumed, in line with our consolidation -- sorry, in line with the company's consolidation and growth strategy, as previously disclosed.

Financing cash flows increased in the first quarter compared to the same period last year, mainly as a result of increased borrowings to fund the business acquisitions just discussed, offset by cash preservation measures such as lower repayments under the revolving facility and the suspension of the dividend. Excluding the impact of IFRS 16, financing cash flows increased to $30.1 million.

Net debt to adjusted EBITDA attributed to shareholders was 2.96x or 3.25x, excluding IFRS 16 compared to 2.63 at the end of the first quarter 2019. The increase is tied directly to the resumption of our acquisition strategy.

As at March 28, 2020, $24.7 million was available for use from the company's revolving credit facility. In April 2020, to strengthen the balance sheet, the company successfully secured an additional $33.9 million in financing for working capital purposes and for continued acquisitions.

In addition, the company is in advanced negotiations to obtain an additional $40 million of unsecured debt for cash flow and M&A activities from the development capital fund.

The Board of Directors has elected to suspend the regular quarterly dividend and the corresponding dividend reinvestment plan for Q1 2020.

Thank you for taking the time to listen to this review. I will now pass the call back over to Antoine.

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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. I now open the floor to 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 Zachary Evershed from National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [2]

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Congrats on the quarter. So cost containment was much, much more successful than we had anticipated for your first quarter. And you're guiding now for outlined savings to be mainly realized during Q2. So could you help us pinpoint the magnitude of margin compression you're expecting year-over-year for Q2 or maybe provide an idea of what you've seen so far?

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

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I'm afraid I can't do either as we don't give that further guidance. But you can anticipate that the efficiency of cost control measures that you've seen on part of Q1 will carry on over to Q2.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [4]

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Understood. And how's the protective eyewear rollout going?

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

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The business unit, as outlined in our 2020 plan, has actually not rolled out, which is consistent in the regular business of safety eyewear to businesses -- it's mostly B2B to businesses that are using safety eyewear as a mandatory feature. On the other hand, we've been quite busy on the safety eyewear front, mostly providing protective eyewear to health care facilities. So it has been a consistent volume of business and of production through the factory and of shipment through distribution centers throughout the confinement period.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [6]

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And then on the subject of Topology, will we be seeing the app made available in Canada soon?

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

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Yes. We already had rolled out to a number of eyewear stores, a Topology store app. All of those 12 stores went into shut down as part of the store portfolio that was shut. They will reopen with an expanded version of that. And then the consumer direct app will be available later this year.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [8]

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That's great color. And if the trends that you're seeing in the market continue and the reopening goes smoothly. How soon would you expect to resume M&A activity?

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

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M&A timing is always -- it's more a seller's choice than the buyer's choice. So we -- there is obviously a fairly active pipeline, but it's always difficult being the buyer to give prediction on the timing of the different steps in the transaction process?

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [10]

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And then just 1 last one from me. You've had success in amending our credit agreement, and now you're working towards tapping private debt markets to further improve flexibility. Wasn't equity offering considered at any point? And how do you think about that when you're evaluating financing?

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

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Equity was not considered as part of getting us through the -- an extended shutdown as it appeared to me that this was something achievable with our current lenders. And I was proven right. We have the flexibility now and even more very shortly as we expected to formalize another agreement. We have the autonomy to sustain an extended shutdown. Although we know now that there is at least a temporary end to the shutdown.

But interestingly as well, this available funding that we have secured will give us the might we think we will need after the restart to resume external growth. So I would say equity raise is one of the options that we have always considered, that we have used actually 3 times in the past 7 years. And it is -- it remains an option in the same sort of situation, which means a specific transaction.

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Operator [12]

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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 [13]

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Excellent. So in closing, I would like to share a few thoughts. Firstly, a strong performance up to the onset of the crisis gave us a strong footing going into the crisis, strong footing, which we have leveraged. Secondly, our industry and our company are predictable often and resilient always. So I anticipate that we will resume our journey of profitable growth post-crisis in an environment possibly even richer with opportunities for reliable operators and integrators like ourselves.

And lastly, I am, as ever, bewildered of the New Look Vision people from the stores, which remain open for emergencies to the manager's home working extended hours to steer the company through the unknown, to the confines, to the optometrist, who took on emergency examination, for everybody my heartfelt thanks for a sterling job. I thank you for dialing in. And I'm looking forward reconnecting with you in the summer to discuss our second quarter results. Stay safe. Goodbye for now.

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Operator [14]

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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.