Edited Transcript of UNS.TO earnings conference call or presentation 19-Feb-20 1:00pm GMT

Now let us turn to our results. For the year, in constant currencies, sales increased 1.1%, driven by the contribution from acquisitions and organic growth. Adjusted earnings before tax decreased to $40.7 million, impacted by market conditions at FinishMaster, network investments and higher borrowing costs. Now let’s look at our most recent quarter.

Our fourth quarter is typically our softest quarter of the year. This year was no exception, combined with the softer market conditions in all 3 business segments. However, we are seeing encouraging signs as we continue to successfully implement the Performance Improvement Plan, which continued to yield tangible results in The Parts Alliance and especially FinishMaster, where profitability was up year-over-year for the first time in 2019. Sales decreased 1.6% for the quarter compared to the same quarter last year, reflecting a solid market condition as well as erosion of sales from the integration of company-owned stores, which represented 80 basis points of the decline.

These factors were partially offset by the contribution of the acquisitions that — as previously mentioned. In the quarter, we integrated 14 more stores, ending the year with 434 stores, and generated an additional $8.2 million in annualized savings for the quarter.

On a year-over-year basis, the adjusted earnings before tax decreased to $5.4 million or a margin of 1.3%, mainly explained by the pricing pressures and the evolving customer mix at FM, negative organic growth, which impacted buying conditions and the absorption of the fixed costs. Let me go into the PIP in more detail on Page 6, please.

We are pleased to report, at the end of the year, we surpassed the objective in both terms and timing and savings. We delivered what we set out to do in 2019. The initiatives were — since the initiatives were launched, we generated, for the 3 business units, the annualized savings of $50.6 million. As indicated before, we expect these savings to be fully materialized in 2020. Also, the actions taken and realized in 2019 by the 3 segments, approximately 50% of these savings found its way to our operating results for the year, and about 20% benefited for the fourth quarter.

As the current initiatives gradually come to a close, we will continue to strategically look for the optimization opportunities in our network to make continuous improvements as part of our culture moving forward.

Now let’s turn to Page 7 for FinishMaster. Sales for the fourth quarter decreased 2.5%, impacted by the erosion of 1.3% from the integration of company-owned stores and negative organic growth. While the erosion of sales was more significant during the fourth quarter, reflecting the full impact of the stores already integrated in the back half of the year. These results remain in line with our expectations.

In the quarter, we continued to execute the integration of 7 stores for a total of 29 stores in 2019, ending the year at 180 stores. Adjusted earnings before tax-related margin reached $9.3 million and 4.7% of sales, respectively, up year-over-year for the first time in 2019.

As you recall, in last October, we appointed Rob Molenaar as the Interim President and CEO of FinishMaster. We are currently in the recruitment process and making good progress. The refinished markets continue to be soft as a result of lower collision claims, ongoing consolidation in the refinish market and the advancing technologies. Although we expect the market to be slightly down in terms of volume in 2020, we will continue to drive our top line by executing our sales strategies in the various refinish channels in which we serve.

Please turn to Page 8 for Canada. Sales for the fourth quarter were stable year-over-year as the contribution from acquisitions offset the negative organic growth in the fourth quarter. Organic growth was impacted by the timing — the different timing of the sales of PBE, as indicated in the previous quarter, which was partially offset by the higher sales of our private brand products.

When you look at the full year of 2019, in constant currencies, sales were up 4.8%, driven by a solid organic growth of 2.4% and the contribution of the business acquisitions. In the quarter, we continued to grow BUMPER TO BUMPER membership and loyalty. We also experienced another strong quarter of improvement of our company-owned stores, which bodes well for us in 2020. We continued with the integration of one store, the completion of the integration of the PartsWatch point-of-sale system and all the legacy BUMPER TO BUMPER company-owned stores. We also continue with the successful integration of the Autochoice acquisition last year.

Our adjusted earnings before tax reached $3.6 million or 3% of sales, down from $6.5 million or 5.3% of sales last year. Realized savings from the PIP and the contribution from acquisitions were more than compensated by the favorable onetime items of the fourth quarter of last year. However, when comparing to last year, adjusted earnings before tax were up 27.8% to $25.3 million, and the related margin reached 4.9%, up 100 basis points.

Now turn to Page 9 for the Parts Alliance, please. In constant currency, sales decreased 1.3% versus the same period last year, due to the erosion of the sales of 80 basis points resulting from the integration of the company-owned stores and the negative organic growth. Organic growth continued to be impacted by the macroeconomic challenges in the U.K., partially offset by the contribution of the recently opened greenfields. In the quarter, we opened 2 for a total of 5 for the year, and 20 since we acquired TPA.

To address the new market realities, we accelerated the PIP, we reshaped our regional management teams, improved our productivity and our logistics to support ourselves and network efficiencies. We also integrated 6 stores in the quarter for a total of 10 for the year, ending the year at 179 stores.

These initiatives not — will not only benefit TPA in the short term, but they will position the business positively for the — as the market gradually recovers.

On a year-over-year basis, the adjusted earnings before tax for the quarter was $300,000 or 0.3% of sales compared to $1.2 million or 1.2% of sales last year. The decrease is primarily due to the lower sales volume, recent investment in our supply chain of 5 greenfields, our new national distribution center, the 18 converted branches into regional hubs, partially offset by the savings of the PIP, which has started to materialize as expected in a more meaningful way.

The U.K. left the EU on January 31, entering into a 11-month transition period, which could also create an ongoing uncertainty. Having said this, it is important to understand that the long-term fundamentals of the U.K. auto parts market remain sound, and we’ll continue to execute our business strategy.

In fact, in the recent — with the recent greenfields opened, we were able to further support the national account business in the quarter, and we expect to see that to continue in 2020. Furthermore, in 2020, we integrated the — we will integrate the last operating entity to TPA’s point-of-sale system, which will lead to additional operating benefits to greater efficiencies.

I will now turn the call 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, Brett. Good morning, everyone. Please turn to Page 13 for the consolidated profits.

For the fourth quarter, we reported a loss of $49.4 million or $1.17 per share versus a loss of $2.4 million or $0.006 (sic) [$0.06] per share last year, mainly due to special nonrecurring costs, in particular, an impairment loss on goodwill related to the U.K. totaling $45 million or $1.06 per share.

Adjusted earnings for the quarter totaled $4.6 million or $0.11 per share versus $5.4 million or $0.13 per share last year. The decrease in adjusted earnings was mainly attributable to lower adjusted earnings before tax and a different income tax rate. In addition, additional information is available on Slide 21, including pro forma adjusted EBITDA to help you better understand our results.

Now let me comment on our cash flow on Page 14. In the fourth quarter of 2019, cash flow provided by operating activities were $3.5 million versus $13.4 million last year. This variation was mainly attributable to a different timing of purchases and vendor financing transaction, partly offset by reduced purchases of inventory and lower corporate tax installments.

In fact, we continue to optimize our inventory throughout the 3 operating segments. We generated $24.1 million of free cash flow for the quarter compared to $7.8 million last year, due to a lower level of corporate tax installment and investment in capital expenditure.

For the year, we generated $33.3 million in cash flow from operations, down from $95.6 million last year, mainly as a result of a onetime $55 million cash outflow due to change in payment terms for one of our large supplier. Excluding this factor, we would have ended the year [easily] in line with 2018. Given the situation, we managed our balance sheet very prudently throughout the year. As shown on our consolidated cash flow statement, we reduced our net investment in merchant advances from $32.6 million in 2018 to $10.4 million in 2019, spending marginally less than our normal run rate. We also did not make any material acquisition and maintain our net investment in CapEx at $22.1 million, a similar level to 2018.

Dividends were also maintained at similar level of $11.9 million. In fact, when taking these individual items as a whole, we invested $55 million less in 2019 than in 2018 and generated $19.5 million with the sale of the ProColor banner program. Today, the Board of Directors declared a quarterly dividend of $0.0925 per share, payable on April 21, 2020, to shareholders of record as of March 31, 2020. This represents a dividend yield of 2.79% at yesterday closing price.

Turning to Page 15. As at December 31, 2019, our outstanding total net debt stood at $449 million, including $101 million of lease obligation versus $530 million, including $104 million of lease obligations 3 months earlier. And our funded debt-to-adjusted EBITDA ratio stood at 3.46x versus 4.09x last quarter. This reduced leverage is a direct result of the convertible debenture financing completed in December.

In addition to providing us with greater flexibility, this financial instrument immediately will improve our leverage ratio and bank covenant as it is considered quasi equity for both bank covenant calculation and for our reported ratios. This completes the financial review for the fourth quarter.

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

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

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Thank you, Eric. With the successful execution of the Performance Improvement Plans in each of the businesses, the strategic review now being concluded, the new financing in place, we are well positioned for the continued transformation of our operations and set the path forward for our future growth.

In 2020, we will build on the work we’ve accomplished in 2019 by executing our sales initiatives, which will continue to position the business for strategic growth. Our new continuous improvement culture will continue to improve our profitability in all 3 business segments and maximize our shareholder value.

I would like to take a moment to discuss the Investor Relations activities. We are taking the opportunity to inform you that we are looking into an Investor Day in the coming months. We will provide more detail once we finalize the date. In closing, we want to thank our shareholders, our customers, our team members and our suppliers for their ongoing support.

This concludes the presentation. We’re now ready for 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 Benoit Poirier with Desjardins.

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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 the expectation for 2020 in terms of organic growth, given the soft finish we saw towards the end of 2019? And maybe what kind of color you can provide in terms of organic growth expectations?

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

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So Benoit, we’re not giving guidance or outlook on 2020. At this time, we’re pretty much focused on the continual improvement of the business and operating it at this point. So at this point, we’re not giving an outlook.

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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. Perfect. And when I look at the PIP, obviously you’re now closer to $51 million. What would be the incremental contribution in terms of cost saving that we should see in 2020 that would come from the PIP?

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Eric Bussieres, Uni-Select Inc. – Executive VP & CFO [5]

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Well, Benoit, if you look at our remarks during the call, what we said is the actions taken in 2019 and realized in 2019, which is basically $31.9 million, about half of that was actually — impacted our 2019 results. And of that amount, of the $31.9 million, 20% was actually finance weighing in Q4. So the fact, though, it tells you a little bit about the run rate going forward, with that was strategic and PIP initiatives that we’ve done.

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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. So — okay. Okay. Perfect. And given the softer market environment, when I look at the organic growth, would it be fair to expect further cost reduction initiative on top of the $51 million that you’ve announced so far?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [7]

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I would just simply say, Benoit, we believe that there’s plenty of opportunity for us to continue to optimize the 3 business segments. And our culture will really be about a continual improvement process, so that it’s just not an event or a — it will be part of our ongoing process.

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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. Perfect. And Eric, when I look at your balance sheet, 3.5x at the end of the year, if you exclude the convertible debt. Could you talk a little bit about the free cash flow expectation for 2020? And the flexibility that your balance sheet provides right now to invest in the business organically or through M&A.?

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

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Yes. So look, I would — first of all, in 2020, there is nothing that we are aware at this point that would impact from a supplier perspective and supply chain perspective, payment terms that we have, right. So the event that we experienced in 2019 with the reversal of some of the payables linked to payment terms, we don’t expect that in 2020. So that’s — I would say that’s the first thing. If you look at our cash generation in 2018 and 2019, it’s somewhat similar. So I think it’s a good guidance to think about this going forward. And the other factor you have to keep in mind is we use about — 55% of the CAD 125 million convertible bond was used to apply against the debt. The balance is money that was applied against the revolver, but can be used, obviously, for M&A or growth opportunities, including continuous improvement initiatives that we have throughout the 3 businesses. So I think we have the flexibility in 2020 to do what we are set up to do and also provide a decent return to the shareholders based on diverse activities that we’re conducting.

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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. Could you talk a little bit about your organic growth opportunities, your CapEx expectation for 2020? And maybe the potential capital and low gear toward M&A that you foresee for 2020, Eric?

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

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Well, all I can tell you is, my expectation in terms of CapEx is very much in line with what we spent in 2018 and 2019. As it relates to organic growth, it’s a big question, right, Benoit, with what’s going on worldwide. Who knows what will be the impact on the GDP growth of the different countries. But no, all things being equal, I would expect similar trends in 2020 than we’ve experienced in 2019. And we’re well positioned in the U.K. for a recovery, and we’ve done a lot of work to make sure that whatever we did on the PIP would not impact the business negatively, if there is a recovery. So that’s a good thing. The Canadian business is healthy and performing. And we — there’s nothing in the horizon that would tell me that this should be materially different. And FinishMaster, as we all know, we’ve done a lot of work at FinishMaster, and we expect to reap some of the benefits of that in the going — in the coming quarters.

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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. And lastly for me, could you maybe provide some color about the retention, the capabilities to retain employee independent Jobber, given you went through the strategic review? I’m just curious whether it has impacted some key matrix or turnover ratios at Uni-Select, given the strategic review that was completed?

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

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Yes. It’s an excellent question, Benoit. I would tell you, from a customer point of view, our customers have never been stronger. Our loyalty is at a high rate today, higher than in the past. And I think we’ve continued to invest in the value proposition for them, so that they can grow their business and we can be a better supplier to them. From an employee engagement point of view, certainly, as we went through the PIP plans in each one of the 3 businesses, it’s had an impact to our overall turnover rate. But our key employees are certainly secure. And they’re driving the change and leading the continual improvements inside the businesses. So no fear from that.

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Operator [14]

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Your next question comes from the line of Daryl Young with TD Securities.

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Daryl Young, TD Securities Equity Research – Mining Research Associate [15]

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My first question is on the competitive dynamics in the paint industry? And specifically, I guess, what percentage of your sales today are being made to MSOs? I know in the past you’ve defined MSOs as anything 3 stores or more. But I guess, what I’m trying to figure out is how much further margins can potentially erode as this consolidation theme continues at the MSO level? And yes, what the kind of mix of your existing revenue is from MSO versus like the true large MSOs who would be getting at a lower fee versus the mom-and-pops?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [16]

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Look, I think it depends somewhat on the activities that the MSO may or may not pursue in 2020, right? As you probably know, we are more exposed to national MSOs. We have a high concentration on that type of business at FinishMaster perhaps than the market as a whole. It’s a question of alignment with our paint manufacturers. I would tell you that a lot of it is driven by what happens in the market at the [customer] repair level, in which we can’t predict if one will consolidate this market or that market. When that happens, it certainly has some impact on our business model and our margins, and we have to adapt to that reality. As it relates to the speed of migration, look, fundamentally speaking, there is a trend, that trend has been around for — in the last couple of years. We expect this trend to continue. And part of the restructuring that we conducted in 2019 was to allow us to be successful in that segment.

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Daryl Young, TD Securities Equity Research – Mining Research Associate [17]

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Okay. And then in terms of the increase in the competitive dynamic in the industry, can you maybe just give a bit of color on where that’s coming from?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [18]

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Yes. I think it’s important to keep in mind that when you have a consolidating market the way we’re experiencing in the paint business, some of the independent distributors will focus on certain niche markets or down market in some cases. And that is certainly a competitive area where a lot of the distribution is focusing because of what’s going on in the national and regional level, right? So it’s just a normal outcome of that competitive landscape. So in a way, that’s where I would say the bigger pressure is that we can tend to see on the smaller accounts. And then you have the fundamental trend of the consolidation happening. So we’ve got sort of 2 different factors going on in the industry.

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Daryl Young, TD Securities Equity Research – Mining Research Associate [19]

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Got it. Okay. And then in terms of — in the U.K., are you seeing increased competition there as the macro headwinds evolve? Or is it mostly just a lower top level demand from the macro headwinds?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [20]

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I would tell you, we really haven’t — I think all of our competitors are going through the same things that we’re going through. And certainly, everything is being indicated to us that we’re not experiencing anything different than they are. So I think it’s purely a top line that is in the entire country at this point. So I…

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Daryl Young, TD Securities Equity Research – Mining Research Associate [21]

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Okay. And then on M&A potential, in the past, we’ve mentioned there’s a lot of potential in the Jobber network in Canada. Is that still a priority focus to continue working with the jobbers on succession planning?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [22]

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Absolutely is. I mean, we’re looking at it from a strategic point of view, not an opportunistic standpoint. So I would tell you, clearly, it’s part of the growth strategy for Canada moving forward.

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Daryl Young, TD Securities Equity Research – Mining Research Associate [23]

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And then on the dividend, I mean, the payout ratio is fairly low, it’s still at 40-ish percent. Any plans to rethink the dividend strategy at all?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [24]

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Well, that will be something that the board may look into in the foreseeable future. But for now, based on what we know, I think we’re holding our dividend numbers as we’ve stated in the Q4.

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Operator [25]

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(Operator Instructions)

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

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [26]

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Two quick ones for me. Could you give us some examples of the optimization opportunities that you’ll be pursuing in 2020 in each segment?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [27]

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Well, I would say that we’re continuing to look at further automation in all of our processes. Certainly, whether it’s back office or in our distribution and our branch network. We’re also looking at workforce planning and how we optimize our workforces. And also, we’re looking at our route optimization, so that we can be really not only environmentally friendly, but also benefit from our P&L point of view. So those are 3 major initiatives that we’re looking at in all 3 businesses.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [28]

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And freight rates have come off quite a bit from where they were last year. Is that having a significant impact on your bottom line?

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Eric Bussieres, Uni-Select Inc. – Executive VP & CFO [29]

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No. No.

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Brent Windom, Uni-Select Inc. – President, CEO & Director [30]

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I will say, I have not seen that yet. So I think that it’s not been materialized or a material impact to us at this point.

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Zachary Evershed, National Bank Financial, Inc., Research Division – Analyst [31]

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Okay. And then one last one. Are you expecting any incremental contribution from ramping industrial paint distribution in 2020?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [32]

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Certainly. It is one of our growth sectors that we mentioned that we’re supporting. And we’re looking for that to continue to grow. And we’ve made significant investments in our sales organization around that, as well as operationally. So yes, we’re looking for that to continue to grow at a rapid rate, hopefully.

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Operator [33]

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Your next question comes from the line of Jonathan Lamers with BMO.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [34]

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I appreciate that you’ll be holding an Investor Day in the coming months. But — sorry, can you just review for us what areas the further strategic initiatives this year might cover? Will they be — maybe which divisions will be — sorry, you mentioned the route optimization for FinishMaster, I missed the first part of your comment there?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [35]

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No. So they’re not — they’re against all 3 business segments. So we’re looking at route optimization in all of our branches, and we have branches in all 3 businesses today. We’re certainly looking at automation in all of our back-office processes. We’re looking at investing in — to be high in all 3 of our businesses to further drive efficiencies and be able to manage more effectively. So, I mean, all 3 of the things that — we have a list of network initiatives in all 3 businesses that will continue to evolve. This was in a more efficient manner and a more effective manner for both our customers as well as our — benefit to our profitability.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [36]

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I appreciate that you’re not providing guidance, but I believe the paint suppliers generally are looking for volumes to be sort of flat to maybe down slightly at a market level and pricing to be up modestly in 2020. Do you have any thoughts as to the outlook for the overall market for 2020 and over the medium term?

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Eric Bussieres, Uni-Select Inc. – Executive VP & CFO [37]

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Yes. Look, we — as we stated in the speech, if you think about collision claims, we’ve seen some reduction in collision claims in the last few years, and we don’t expect that trend necessarily to change. Volume of paint, as we’ve discussed in the past, is fairly stable to reducing. So the reality is, the organic growth, so to speak, is typically coming from price increase. And then the question becomes, when is the timing of those price increases envisioned. There — it’s probably more in the second half as we know at this point. Having said that, the manufacturer could decide to push price increases sooner or not. But based on what we know at the paint level, it should be more in the second half of the year.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [38]

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And on the competition, I believe this is the second quarter where that’s been called out. Was there a step change in competitive dynamics at some point last year that will be lapped sort of by the second half of this year?

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Eric Bussieres, Uni-Select Inc. – Executive VP & CFO [39]

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No, I wouldn’t say there’s been an event or — I think it’s what we’re seeing in the market. And as I was explaining earlier on, the fact that you got some more localized distributors that are fighting for a market share in a local market that is getting smaller and smaller, right? And that’s where we’ve seen certain markets because those national accounts or regional accounts have been consolidating. And that’s what we’re referring to in terms of pricing pressure in that tier of traditional smaller accounts.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [40]

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And if I could just ask about the board changes. How many board meetings have there have been since January 1? And Birch Hill provided any indication of change they would like to see?

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Brent Windom, Uni-Select Inc. – President, CEO & Director [41]

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So I would say this is our first board meeting since the 1st of the year. And Birch Hill’s — we’re excited to have them to be part of the board. And certainly, we have 9 board members and they’re — they have their position, and all of them speak their mind. So I’m not worried about 2, I have 9. So — but no, not at this point, it’s all good.

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Operator [42]

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There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

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Brent Windom, Uni-Select Inc. – President, CEO & Director [43]

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Thank you very much. We look forward to seeing you and talking to you in the very near future. And certainly, as we indicated, as soon as we get the finalized date for the Investor Day, Eric and I will be sharing that with you. Thank you for your support.

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Operator [44]

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This concludes this conference call. You may now disconnect.