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Edited Transcript of BCI.TO earnings conference call or presentation 13-Nov-18 6:00pm GMT

Q3 2018 New Look Vision Group Inc Earnings Call

MONTREAL Jan 4, 2019 (Thomson StreetEvents) -- Edited Transcript of New Look Vision Group Inc earnings conference call or presentation Tuesday, November 13, 2018 at 6:00:00pm 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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* Lennox Gibbs

TD Securities Equity Research - Research Analyst

* Martin Landry

GMP Securities L.P., Research Division - MD Equity Research & Equity Research 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 Third Quarter 2018 Results Conference Call. (foreign language) (Operator Instructions) Before we begin, let me remind you that certain statements during this 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's Chief Executive Officer and President, who will review the third quarter 2018 financial results. We will then open it 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 am here with Tania Clarke, our CFO. Together, we're going to take you through a review of our third quarter 2018 and year-to-date results, after which, we will take your questions.

First, some highlights for the quarter as compared to Q3 2017. Revenues for the third quarter were $72.9 million, 32% higher, driven by the acquisition of IRIS and comparable store growth. Comparable store sales were up 0.2%, our 17th consecutive quarter of comparable store sales growth. The relatively slower rate of growth is explained by lower optometrist availability. This was due to doctors having taken more time off and retirements not yet replaced by graduates.

Adjusted EBITDA reached $13.9 million, an increase of 28.6% compared to the same period last year. Correspondingly, adjusted cash flows from operating activities were $13.6 million, an increase of 27.1% over last year. Adjusted net earnings attributed to shareholders reached $0.56 per share, an increase of 19.1%. The company did not make any acquisitions in the third quarter as the focus continues to be deleveraging and integration of prior acquisitions. We did deliver on that objective since the company deleveraged $3.1 million in excess of contractual payments in the quarter and $5.3 million on a year-to-date basis.

We have continued to strengthen the executive team with 2 appointments: first, Michael Tovey, Vice President of Frames and Product Development; and secondly, Sebastian DuBois, Vice President, Real Estate and Construction.

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, I would like to note that our complete financial statements and MD&A for the third quarter of 2018 have been filed with SEDAR and are available on our website.

Now turning to our results. Revenues increased 32% in the third quarter and 36% year-to-date as a result of the following 4 key factors: the addition of revenues from the IRIS acquisition in October 2017; comparable store sales increased 0.2% in the quarter and 1.4% year-to-date; the sales from noncomparable stores, namely the net addition of 12 stores other than IRIS in 2017, resulting from 11 acquisitions, 3 openings and 2 closures. These stores were not comparable for part or all of the periods examined but contributed to total revenue growth. Third, sales from one new store opened in 2018; and finally, these revenues offset by lost revenue from 3 scheduled stores' closures in Q3 2018, in addition to 4 scheduled closures earlier in the year.

Total operating expenses decreased 40 basis points to 82% of revenue in the third quarter and decreased 100 basis points to 83.5% year-to-date. These decreases in the quarter and on a year-to-date basis are mainly due to lower acquisition-related costs and lower materials consumed, which offset the impact of higher cost ratios of acquired businesses, rising wages due to competitive labor markets and higher other noncomparable costs. Materials consumed as a percentage of revenue were flat in the quarter. The impact of newly acquired businesses and promotional efforts in the third quarter to drive sales offsets the benefits from purchasing and manufacturing synergies in the period.

On a year-to-date basis, materials consumed decreased 20 basis points to 22.3% of revenues, driven by purchasing and manufacturing synergies being achieved across the groups.

Employee remuneration expenses, excluding equity-based compensation and other noncomparable costs as a percentage of revenue, increased by 50 basis points in the third quarter to 32.2% and increased 30 basis points on a year-to-date basis to 33.1%. The increase reflects market pressures, particularly in Quebec and Ontario, where the tight labor market is causing wages to increase as well as the impact of rising minimum wages in certain jurisdictions directly impacting store wages. Other operating expenses, excluding acquisition-related and other noncomparable costs increased 40 basis points to 26.4% of revenue in the third quarter and 26.9% on a year-to-date basis versus the same periods last year.

This variation is primarily due to newly acquired businesses operating at higher cost ratios and integration-related projects, partially offset by ongoing cost control programs in stores and at the corporate level.

Other noncomparable costs have been incurred in both the quarter and year-to-date periods in amounts higher than last year as a result of integration and rationalization efforts. As discussed on previous calls, EBITDA, together with cash flow, are the primary valuation metrics in our industry. Therefore, we have chosen to report adjusted EBITDA 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, losses from changes in fair value of foreign exchange contracts.

As a result of the factors I have just covered, Q3 2018 adjusted EBITDA rose 28.6% year-over-year to $13.9 million, representing a decrease of 50 basis points to reach 19.1% of revenue. On a year-to-date basis, adjusted EBITDA rose 37% year-over-year to $40.6 million, representing an increase of 10 basis points to reach 18.4% of revenue.

On a diluted basis, the third quarter adjusted EBITDA per share reached $0.89, an increase of $0.12 or 15.6% over last year. Adjusted net earnings attributed to shareholders increased for the quarter by 33.7% to $8.8 million. On a year-to-date basis, adjusted net earnings increased by 37.8% to $25 million.

The difference between the increases in adjusted EBITDA and adjusted net earnings attributed to shareholders for the quarter and for the year-to-date as compared to the same periods last year is explained as follows. There are 3 factors impacting the quarter and year-to-date periods: firstly, a $1.2 million increase in financial expenses in the third quarter, net of interest revenues and excluding the impact of any change in the fair value of interest rate swaps and a $3.5 million increase on a year-to-date basis. These increases stem primarily from higher debt tied to the IRIS acquisition in 2017; secondly, income taxes adjusted for acquisition-related costs, other noncomparable costs and depreciation increased by $0.2 million in the quarter and on a year-to-date basis, by $1.6 million; thirdly, a favorable change in the fair value of interest rate swaps of $0.4 million was incurred in the quarter, which partially offsets the above-noted factors. On a year-to-date basis, there was a favorable change of $1 million in this category.

As a result of those factors, the diluted adjusted net earnings per share for the quarter increased by 19.1% to $0.56 per share and increased 23.1% to $1.60 for the 39-week period.

Net earnings attributed to shareholders increased by 43.1% for the quarter to $4.9 million and by 51.8% to $11.1 million. The increases in both the quarter and year-to-date periods are mainly attributable to the higher EBITDA described above, partially offset by higher depreciation, financing expenses and income taxes. Net earnings on a per share diluted basis were $0.31 per share compared to $0.24, representing an increase of 29.2% in the quarter and an increase of 36.5% for the year-to-date.

The company's year-to-date cash flow reflects strength in cash flows from operations and actions to support the company's goal of deleveraging the balance sheet. Cash flows related to operating activities in the third quarter were $9.5 million, a decrease of $0.6 million over last year, driven by the use of cash by working capital items, which is mainly a result of timing and higher income taxes paid. These items offset the higher EBITDA in the quarter, which is principally due to the addition of IRIS as well as increased performance from comparable stores.

On a year-to-date basis, operating cash flows increased by $4.6 million to $27.4 million. This increase is mainly attributed to the higher EBITDA as mentioned, as described earlier, partially offset by a greater use of cash by working capital items and higher income taxes paid.

Free cash flow, as defined as operating cash flows after acquisitions of property, plant and equipment, decreased by $0.2 million in the quarter due to lower cash flows from operating activities, as described earlier, partially offset by lower investment in property, plants and equipment. The variation in property, plants and equipment is mainly due to timing as well.

On a year-to-date basis, free cash flow increased by $6.4 million. The year-to-date increase indicates a favorable trend in cash flows from operations after considering capital investments for the maintenance of the company's asset base. Purchases of property, plants and equipment not related to business acquisitions relate primarily to investments in store and manufacturing and distribution center upgrades, information technology upgrades and the purchase of eye examination equipment. All of these items drive revenue growth and reduce cost by creating synergies.

As a percentage of adjusted EBITDA, free cash flows represented 60.8% in Q3 compared to 80.6% last year, all related to timing changes. Year-to-date, free cash flows represented 50% compared to 46.5% last year.

Investing cash flows increased in the third quarter and the 39-week period compared to the same period last year since there were no business acquisitions in the current year, lower repayments of loans and advances and normal variations in investments and property, plant and equipment in the quarter and in the 39-week period. Financing cash flows decreased in the third quarter and year-to-date period as compared to last year as a result of the company's deleveraging efforts for the year, totaling $12.4 million on a year-to-date basis, which includes $5.3 million of voluntary repayments on the company's revolving credit facility. Additionally, the company paid out more dividends in the quarter on a year-to-date basis due to a higher number of outstanding shares compared to last year.

Adjusted cash flows from operating activities are also trending positively, with an increase of 27.1% over last year in the quarter and 33% year-to-date. These increases are consistent with the increased EBITDA as mentioned earlier. Overall, the quarter and year-to-date periods ended with net decreases in cash as the company continues to focus on its goal of deleveraging.

Now turning to the balance sheet. Cash at the end of the quarter was $6.2 million versus $13.6 million at the end of fiscal 2017, principally impacted by $12.4 million of debt servicing, which included the voluntary payments of $5.3 million, 70 -- $7.2 million of CapEx investment, dividend payments of $7 million, and all of which are offset by higher cash generated from operating activities. Total debt decreased by $14 million due to repayments since the year-end of 2017. As of September 29, 2018, $31 million was available for use from the revolving -- under the revolving credit facility. The quarterly dividend of $0.15 per share was declared on November 12, 2018, unchanged from prior periods for shareholders of record on December 20, 2018.

To note, the company's dividend reinvestment program is maintained, and 8.1% of the dividends declared in August 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.

Year-to-date results are strong and the foundation with a healthy balance sheet is in place, and we'll continue to allow the company to pursue its strategic goals.

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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 take your questions now.

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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 Martin Landry from GMP Securities.

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

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My first question, Antoine, is you mentioned that you had, during the quarter, a lower availability of optometrists and that impacted your sales. Wondering when did you see that occurring during the quarter. And as of now, has this been resolved? Or do you think it's going to linger into Q4?

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

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It appeared second half of the quarter, and it's on the way to be resolved as we speak.

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

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Okay. So potentially, it could have a little bit of an impact into -- in your Q4 sales?

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

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I'll let you dwell on this because as you know, we don't give guidance. So...

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

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Okay. Okay. And I seem to recall hearing that issue as well last year. Is this a seasonal issue that the industry is facing or...

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

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I think your recollection might be actually 2 or 3 years ago, when we had a similar issue in Q2, and that must have been 2014 or 2015. Probably 2014, I would say. You're also making a good point. There is a bit of seasonality. Basically, new graduates come out of school towards June time, and depending on how long of a holiday they take before joining a practice, there might be a bit of a lag spanning the summer and sometime into the fall as well. But usually, the magnitude of it is not reflected in total numbers. Some years, it is big enough to actually impact the results temporarily.

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

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Okay. Okay. And on your OpEx, you're talking about market pressure causing wages to increase. Wondering how much flexibility do you have in passing on those higher OpEx to your customers. Are you -- do you find that you're seeing a little bit of resistance to price increases? Or do you have flexibility there?

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

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We have not tested the elasticity, to be honest, as we are trying through efficiency to absorb the impact of salary pressure. Just after the salary pressure materializes, we need some time for efficiency to wipe it off. I think that's where we stand time-wise. Now as to would we be able to pass it on to the customers, we have not need -- we feel we have not needed to answer that question yet, but consider it maybe as dry powder just in case we would need to do that.

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

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Okay. Okay. And my last question. Wondering if you can give us an update on the synergies from the IRIS acquisition. I believe you had mentioned that you expected to realize $4 million in synergies over 3 years. Can you quantify how much you've realized to date?

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

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I think we're on course to doing that. And I think we're a bit ahead of schedule, as mentioned, I think, during the last call.

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Operator [12]

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(Operator Instructions) Your next question comes from the line of Lennox Gibbs from TD Securities.

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Lennox Gibbs, TD Securities Equity Research - Research Analyst [13]

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So just returning to the issue, the tight labor markets in Ontario and Quebec, just looking for some clarification as to exactly how those pressures manifested during the quarter, whether the pressure was limited to when you onboarded new hires, or is it more pervasive and something that might be affecting staff retention. And also, who really is most affected? I'm assuming it's been [nonprofessional] staff. Can you clarify there as well, please?

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

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Lennox, first of all, good afternoon. Thank you for joining and asking your question. The answer to that is it's not limited to new employees. It's overall. It's -- if unaddressed, it would possibly have an impact on staff retention. But it is something we're not eager to test obviously, and it is prevalent in Ontario and the province of Quebec.

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Lennox Gibbs, TD Securities Equity Research - Research Analyst [15]

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Right. And just with respect to the last part of the question, who is most affected? Is it the nonprofessional staff that's...

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

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It's overall. It's overall.

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Operator [17]

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

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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, to say that we are where we wanted to be 1 year after closing the IRIS acquisition, integrating our acquired businesses and generating cost synergies, focusing on deleveraging our balance sheet, gearing up to lead again the Canadian retail optical market consolidation and making plans for additional business segments in our current locations. I thank you for dialing in, and I am looking forward to reconnecting with you next year to discuss our fourth quarter and fiscal year 2018 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 your participation and ask that you please disconnect. Have a great day.