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Edited Transcript of UNS.TO earnings conference call or presentation 13-Nov-19 1:00pm GMT

Q3 2019 Uni-Select Inc Earnings Call

Boucherville Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Uni-Select Inc earnings conference call or presentation Wednesday, November 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Windom

Uni-Select Inc. - President, CEO & Director

* Eric Bussieres

Uni-Select Inc. - Executive VP & CFO

* Me Louis Juneau

Uni-Select Inc. - Chief Legal & Administrative Officer and Corporate Secretary

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Conference Call Participants

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* Benoit Poirier

Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst

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Presentation

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Operator [1]

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(foreign language)

Ladies and gentlemen, thank you for standing by, and welcome to the Uni-Select third quarter results. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would like now to hand the conference over to your speaker today, Louis Juneau, Chief Executive -- Chief Legal Officer. Thank you. Mr. Juneau, please go ahead.

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Me Louis Juneau, Uni-Select Inc. - Chief Legal & Administrative Officer and Corporate Secretary [2]

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Thank you, Lucy. Good morning, everyone, and thank you for joining us for the Uni-Select third quarter conference call. Presenting this morning are Brent Windom, President and CEO of Uni-Select and President and COO of the Canadian Automotive Group; and Eric Bussieres, Executive President and Chief Financial Officer.

Following their comments, we will open the call for questions. Please note that all documents referred to in today's conference call, including this webcast presentation, can be found on our website at uniselect.com in the Investors section.

As noted on Slide 2, I would like to remind you about the caution regarding forward-looking statements, which is applied to our presentation and comments. All amounts are expressed in U.S. dollars except as otherwise specified.

As noted on Slide 3, recall that on January 1, 2019, the corporation applied for the first time IFRS 16 leases using the modified retrospective transition approach and did not restate comparative amounts of the year prior to its adoption as permitted. As a result, the 2019 interim condensed consolidated financial statements present significant variances when compared to 2018. Furthermore, with the adoption of IFRS 16 on leases, the geography of certain items on the statements of earnings are impacted. Under the new standard, most leases are no longer treated as operating leases, resulting into a higher EBITDA, while increasing the finance cost from the interest expense on leases, liability and a higher depreciation linked to the right to use those assets. As a result, we consider the earnings before tax as the preferable comparative measure to explain our results and performance. Please refer to the adoption of IFRS 16 leases section in the -- of the MD&A for further details.

With that, let me turn the call over to Brent.

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Brent Windom, Uni-Select Inc. - President, CEO & Director [3]

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Good morning. Thank you, everyone, for joining us. Please turn to Page 5. We'll review our third quarter results. But before I begin, I would like to thank each of our 6,000-plus team members for their dedication to our customers and to the improvement of our business. We are pleased with our continued efforts and the execution of our Performance Improvement Plan in all 3 business segments. Over the past year and since I have become CEO of Uni-Select, we've taken concrete steps to navigate through headwinds, stabilizing the business where required and investing strategically. We have continued to optimize our network by making investments, such as Canada's largest distribution center in Calgary, along with a newly centrally located distribution center in the U.K., opening greenfield stores in both U.K. and Canada and while accelerating our Performance Improvement Plan.

Our third quarter results were in line with expectations despite the continued macroeconomic and refinish industry challenges in some key markets. FinishMaster's profitability continually improved on a sequential basis as the adjusted earnings before tax increased by 70 basis points. In the U.K., while our business faced a prolonged uncertainty surrounding Brexit, the cost-saving initiatives recently put in place started to impact our third quarter with marked profitability improvement of 330 basis points and while -- and will materialize in a more meaningful way in the fourth quarter, while the Canadian Automotive Group continued its momentum -- its growth momentum and increased profitability.

In the quarter, we integrated 8 more stores, ending the quarter with 446 stores and generated additional $13.2 million for a total of $42.4 million in annualized savings since we launched the Performance Improvement Plan. In constant currency, our sales increased 1.9% in the third quarter, primarily driven by the number of billing days and acquisitions. While organic growth was positive 1.3% at CAG, and given the softness of the refinish market, FinishMaster was slightly negative. TPA was negative 2.6% due to the microeconomics of Brexit and the loss of the national account at the end of 2018.

On a year-over-year basis, the adjusted earnings before tax decreased 31% to $14 million or a margin of 3.2%, mainly due to the challenging conditions at FinishMaster and TPA as well as higher financial expenses. These factors were partially offset by the continued positive performance from Canada.

Also note on a year-over-year basis, the IFRS 16 had a marginal impact of less than 15 basis points on the adjusted earnings before tax. As expected, we maintained our net debt level similar to the last quarter of $530 million, which included $104 million of lease obligations.

If you would please turn to Page 6 for an update on the PIP. Following the in-depth analysis of the operations and the cost structure of TPA during the quarter, we identified complementary areas of action. Additionally, certain initiatives inside the CAG will allow us to further optimize the supply chain. These 2 factors combined are expected to increase our targeted annualized cost savings by an additional $5 million. As a result, the annualized cost savings as a direct result of the PIP are now expected to increase from $45 million to $50 million by the end of 2020, of which more than 80% or $42.4 million have been realized by the end of September. At the end of the second quarter, we said our savings would reach $45 million and the associated restructuring costs of $20.5 million would be completed by the end of the fiscal 2019, and that is still the case. As it relates to the additional $5 million of annualized savings and restructuring costs announced today, we expect to be -- we expect those to be realized by the end of the first quarter of 2020.

Please turn to Page 7. The review of the strategic alternatives is following its course as indicated on the outset of the process. We have not determined a definitive schedule. However, we are continuing to work diligently on this front. Given the nature of the process, the corporation does not intend to provide further updates until such time the Board approves a definitive transaction, a strategic alternative or otherwise determines further disclosure is appropriate. There is no guarantees that a review of the strategic alternatives will review -- will result in a transaction or a transaction is undertaken of its terms or timing.

Now let's turn to the business on Page 8, please. Sales for the third quarter at FinishMaster were up 70 basis points, driven by the different number of billing days. The softness in the refinish market, offset -- somewhat offset the growth in the national accounts and price increase impacts for the quarter resulting in a slightly negative organic growth of 50 basis points. On a sequential basis, the adjusted earnings before tax margin increased by 70 basis points, which is an encouraging sign. In fact, the quarter, we continued to execute the PIP with the integration of 8 stores, increasing the total to 22 stores year-to-date. The integration process of stores is seamless to our customers as we're able to redistribute the business to the other parts of the network with only a marginal impact on our revenues. On a year-over-year basis, the adjusted earnings before tax reached $13.4 million or 6.2% of sales compared to the $16.7 million or 7.8% of sales last year. The decrease is as a result of the evolving customer mix and pricing pressure, partially offset by the savings of the Performance Improvement Plan.

On October 25, we announced the appointment of Rob Molenaar as the Interim President and CEO of FinishMaster following the resignation of Chris Adams. Mr. Molenaar has been instrumental in the development and execution of the PIP for FinishMaster. He has significant industry-specific restructuring expertise, including a deep knowledge of the automotive refinish space with over 25 years at one of the largest global paint manufacturers. We have commenced the internal and external search for the new President and CEO.

If you would turn to Page 9 for Canada. In constant currency, the sales increased 5.7%. This increase was primarily driven by acquisitions, the effect of the number of billing days and a positive organic growth of 1.3%. The organic growth was driven by loyalty programs, growing our independent customers, the promotion of private brands was somewhat offset by the timing of the sales of PBE.

In the quarter, we continued the integration of our latest acquisition Autochoice Parts & Paints, a 17-store chain in the Atlantic region. The integration is progressing well and is on track. The acquisition has proven to be positive for -- would be a positive addition to our network.

Our adjusted earnings before tax reached $6.9 million or 5.1% of sales, up 6.2 -- up from $6.2 million or 4.7% of sales last year. The increase was driven by the improved performance of our company-owned stores, our PIP initiatives and partially offset by FX.

At the end of the quarter, we sold ProColor banner program for a net gain of $19.4 million. We will continue to support the ProColor banner with a long-term supply agreement. This transaction had no operational impact on the quarter as it was completed on September 30. Going forward, on an annual basis, it will have no impact on our sales and less than $2.5 million impact on the profitability, of which about 1/3 is expected to be offset over time.

Let's turn to Page 10, please. In the U.K., in constant currency, our sales were slightly down, 30 basis points versus the same period last year, somewhat offset by the number of billing days as well and the acquisitions and the negative organic growth of 2.6%, while the overall market is impacted by the prolonged effect of Brexit. And if you exclude the lost sales contract from the fourth quarter last year, our organic sales will be marginally down for the quarter. Also bear in mind that we were also against a very strong comparable quarter last year where we generated organic growth of 9.4%. Having said this, it is important to understand that the long-term fundamentals of the U.K. auto parts aftermarket remain sound. Recall that since we acquired TPA, we have opened 18 greenfields and expect to open 2 in the fourth quarter of this year for a total of 5 in 2019.

On a year-over-year basis, the adjusted earnings before tax was $1.8 million or 1.9% of sales compared to $4.3 million or 4.2% of sales last year. This decrease is primarily due to lower sales volume, recent investment in greenfields and being partially offset by the savings of the PIP. Our initiatives will not only benefit us in the short term, but they will position us -- position the business positively for the -- as the market recovers. As mentioned, TPA's results were a marked improvement of 330 basis points of profitability on a sequential basis. The positive sign that the actions taken to adapt our cost structure and our productivity model have started to bear fruit. In fact, in the third quarter, we realized $5.9 million in annualized savings. These savings will materialize in a more meaningful way in the fourth quarter as we get to the full benefit of the actions taken throughout the third quarter.

With that, I will now turn it over to Eric to complete the financial review. Eric?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [4]

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Thank you, Brent. Good morning, everyone. Please turn to Page 13 for a brief review of pro forma EBITDA. With the IFRS 16, it becomes difficult to compare our 2019 adjusted EBITDA to last year. Consequently, we provide pro forma adjusted EBITDA to help the understanding of our results. On a pro forma basis, the adjusted EBITDA pre-IFRS in the third quarter of 2019 would have stood at $30.3 million, down 13%, as compared to $34.9 million last year for the same reason mentioned by Brent earlier.

Please turn to Page 15 for consolidated profits. For the third quarter, we reported net earnings of $24.6 million or $0.58 per share versus net earnings of $10.6 million or $0.25 per share last year, mainly due to the net gain on the sales of ProColor. Adjusted earnings for the quarter totaled $10.7 million or $0.25 per share versus $15.5 million or $0.37 per share last year. The decrease in adjusted earnings was mainly attributable to the lower adjusted earnings before taxes.

Now let me comment on our cash flow on Page 16. In the third quarter of 2019, cash flow provided by operating activities were $2.1 million versus $72.6 million last year. This variation was mainly attributable to the additional funding required for the working capital, mainly resulting from a change of payment terms of $55 million from a supplier, as we had highlighted in the previous quarters, and a different timing of vendor financing transaction, partly offset by a reduction in inventory.

As a result, we generated $30.3 million of free cash flow for the quarter compared to $36.9 million last year. This variance is explained by a large interest payment in 2019, while 2018 benefited from a greater corporate tax reimbursement.

Turning to Page 17. Since our typical cash flow generation pattern was somewhat altered this year with the onetime charge of payment terms -- change of payment terms of $55 million from 1 supplier in the third quarter, I wanted to highlight that we are working towards neutral cash position in the fourth quarter, which would result in a similar cash generation as of 2018 once you adjust for the onetime payment.

Finally, today the Board of Directors declared a dividend of $0.0925 per share payable on January 21, 2020, to shareholders of record as of December 31, 2019. This represents a dividend yield of 3.4% at yesterday closing price.

Turning to Page 18. As at September 30, 2019, our outstanding total net debt stood at $530 million, including $104 million of lease obligations, similar to our net debt position end of Q2. In the fourth quarter, we will manage our cash flow with the expectation that our debt level remains similar to the third quarter.

Please turn to Page 20 for the outlook. Our organic growth will remain positive for the year, but lower than our guidance. However, we expect our profitability metrics to be in the lower part of the range or slightly below. This completes the financial review of the third quarter.

I will now turn the call back to Brent to conclude.

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Brent Windom, Uni-Select Inc. - President, CEO & Director [5]

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Thanks, Eric. In summary, during the past year, we have made strategic investments to grow our business for the long term. As mentioned, in CAG, we opened our largest distribution center in Calgary. We also opened a BUMPER TO BUMPER superstore in Montréal. We acquired Autochoice, which added a solid 17-store business. We continue to grow our independent -- our loyal independent members.

In TPA, in the past year, we've opened 6 strategically placed greenfields, acquired 3 stores in Ireland, expanding our coverage in the U.K. We also opened a new national distribution center situated in the heart of the U.K., which will allow us the ability to grow while improving our efficiency.

At FinishMaster, we are proud of what we achieved with our PIP plan so far. We continue to optimize our footprint with marginal impact to our sales. While we are doing that, we have been reviewing our distribution model to ensure that we provide the most efficient methods to serve our customers. We are building for the long term.

For the balance of the year, we will continue to execute our plan, build on the solid improvements in each of the 3 businesses as well as managing our working capital and our debt level. Finally, we want to thank all of our shareholders, our customers, our team members for their ongoing support.

This concludes the presentation, and we're ready to answer your questions. Lucy?

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language)

Your next question -- your first question comes from Benoit Poirier.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [2]

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Could you talk a little bit about which key markets do you see some challenges, Brent, more specifically and give maybe some more color?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [3]

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Well, as far as in regards to the FinishMaster business, there's been more in, I would say, the Southern California, the California markets, the Western region for us as a whole. And really, the other key market would be the U.K.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [4]

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Okay. And any reason why there is some softness in those region? Is it related to the hurricane, the Brexit or any more granularity?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [5]

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Well, I would say that as far as the U.K., I think there's enough noise and enough clarity around that market with what we're facing from an economic point of view, with Brexit certainly. And California has just had a tremendous amount of competitive pressure for the last probably 18 to 24 months.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [6]

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Okay. And with respect to the $5 million of additional saving to be achieved by the end of Q1 2020, is it -- I understand it's incremental to the $45 million, but should we expect to have positive impact on the margin or it's mostly to offset softness we see in those markets these days?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [7]

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Well, look, Benoit, I'd say it's hard for us to predict how the market will behave in the next 6 months or so, right? So obviously, we're focusing on controlling our costs and managing our costs accordingly. It's certainly our hope at management that some of those efforts will result into a positive contribution to the earnings. Having said that, it's predicated also on how the top line evolves.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [8]

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Okay. Okay. And with respect to the PIP, there was a 20 bps improvement year-over-year. Launch was in Q2 2018. Is it fair to expect the contribution to strengthen going forward? And what magnitude should we expect on a year-over-year basis?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [9]

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Well, look, as I said, it's a matter of how the top line will evolve and the gross margin, right? I mean the good news for us is we see some stabilization on the margins. We see actually some increase in the margins. I think TPA speaks volume compared to Q2. And we're certainly looking at it more on a sequential basis because, as you know, when you take those actions, it takes a little bit of time before the actions start showing themselves in the actual costs, and that's what we're seeing, right? So we're very pleased with the results to date, and there's nothing that tells us that there will not be -- continue to be the case going forward from what we control.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [10]

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Okay. And looking at your balance sheet, Eric, could you provide some color in terms of free cash flow expectations? Should we expect the number to be comparable to Q4 2018 or the net debt-to-EBITDA to be more comparable to Q3?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [11]

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So our expectation, Benoit, as I said in the speech was that we expect the debt level to be similar to Q3 at the end of 2019. And therefore, the cash flow for Q4 will be somewhat neutral. When you look at it on a 12-month basis, right, what we expect for 2019 versus 2018, the reality is we're generating similar cash flow of 2018, if you remove the fact that we had a onetime $55 million working capital reversal linked to the onetime payment of a supply -- not the supply chain, sorry, but the payment terms changes. So if you neutralize this, you'll see that our cash flows actually will be very similar to the cash flow of 2018.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [12]

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Okay, perfect. And given the ongoing strategic review, could you maybe mention the -- your ability to retain employees in the current environment?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [13]

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Yes. I would answer that. As I said earlier, the over 6,000 employees and the team members we have across the 3 business units fully are engaged. Our leadership teams are executing to the plan. That's why we're seeing the benefits we are and certainly, our -- and the growth in our customers as well. So I'm not -- I have no concerns with that at this point.

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Operator [14]

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(Operator Instructions) At this time, there are no further questions. I turn the call back over to the presenters.

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Brent Windom, Uni-Select Inc. - President, CEO & Director [15]

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Well, thank you this morning for joining us, and thank you for listening to our Q3 results. We look forward to updating you on the progress with our next call. And we'll talk to you soon. Thank you very much.

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Operator [16]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. (foreign language)