Uni-Select Inc

TSX:UNS

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Uni-Select, Inc. first quarter results conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the conference over to your speaker today, Louis Juneau, Chief Legal Officer and Corporate Secretary. Thank you.[Foreign Language]

[Me Louis Juneau]

[Foreign Language] Good morning, everyone. And thank you for joining us for the Uni-Select's first 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 Vice 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 cautions regarding forward-looking statements, which is applied to our presentation and comments. All amounts are expressed in U.S. dollars except as otherwise specified.With that, let me turn the call over to Brent.

[Brent Windom, President, CEO & Director]

Thank you, Louis. Good morning, everyone. And thank you for joining us. In just a few weeks, all of us have entered unprecedented times that will continue to reshape the method that we liberalize by and run our businesses.As we started the new year, having concluded a strategic review, having successfully executed the performance improvement plans, the team was ready for the next step in our continuous improvement. Unfortunately, the current pandemic crisis forced us to address immediate needs of safety and well-being of our teams and those of our customers, to establish business continuity plans, to service the essential services within each of the countries which we operate. We did this very successfully to date, much thanks to the leadership and team Uni-Select for the countless hours and sacrifices made.We will continue to adjust to the dynamic market conditions to ensure we remain in our leadership position in each of the businesses. Today, we will provide an overview as well as comment on the impact of COVID-19 and our strategies moving forward.Please turn to Page 4. Our first quarter is typically a soft quarter. This year was compounded with the impact of COVID-19 in the back half of the month of March. While our first quarter sales were down 2.9%, excluding the impact of COVID-19, we would have been flat year-over-year as our transformation was showing promising signs and traction. We did benefit from an additional billing day, the contribution from acquisitions, the savings from the continual operational improvements. Despite these positive contributors, our profitability was impacted significantly due to COVID-19, along with the foreign exchange losses brought on by the recent volatility in currency markets, a one-time charge and the reduction in volume rebates following the decision to further optimize our inventories.These factors resulted in lower absorption of fixed costs, which ultimately impacted our margins. Excluding the FX losses and the one-time charge, which combined represented $4.8 million, our adjusted EBITDA would have reached $21.6 million or a margin of 5.3%.Also in the quarter, we acquired 3 stores for our Canadian operation. We also integrated 6 stores, realized annualized PIP savings of $2.9 million from the combined contribution of all 3 businesses.The Performance Improvement Plan annualized savings realized since its exception reached $53.5 million at the end of the first quarter. As a result, we ended the quarter with 431 stores in our network from 434 at the end of 2019.Please turn to Page 5. With the onset of COVID-19 in March, we quickly and proactively implemented measures to minimize the impacts on our operations. We've put in place stringent protocols for social distancing, hygiene precautions to safeguard our team members, our customers and our supply partners.We also implemented temporary measures for business continuity. We furloughed approximately 50% of our workforce, reduced our work hours by 20% for all remaining team members. We temporarily closed about 1/3 of our stores in our network, while the stores that remained open, we're operating at reduced hours. We also implemented a cash conservation plan to ensure maximum liquidity and financial flexibility. We tightened the management of working capital and nonessential expenses. We reduced capital expenditures, customer investments, Board of Directors' remuneration and suspended the dividend. These difficult decisions were made to safeguard our team members and our customers to ensure maximum available liquidity until the crisis abates and the market conditions improve.Our objective is to come out of the COVID-19 crisis ready to continue our performance improvement. It's important to note we are continuously monitoring the announcements of the governmental assistance programs, the opening -- the reopening protocols and will make the adjustments when needed.Now let's go to the first quarter results for FinishMaster. Please turn to Page 6. Before I comment on the results, I wanted to formally welcome Joseph McCorry as President and CEO of FinishMaster. Joe is a seasoned executive who brings 25 years of experience in the automotive industry, serving global aftermarket customers. He will be a great addition to our team.FinishMaster sales for the first quarter decreased 1.1%, mainly due to the expected revenue decrease from the integration of 28 company-owned stores within the last 12 months. The lower sales volume primarily related to COVID-19. Organic growth was negative 2% for the quarter. However, excluding the impact of COVID-19, organic growth would have been flat. In the quarter, we continued to execute the PIP with the integration of 2 stores, ending the quarter with 178 stores.Adjusted earnings before tax and related margin reached $4.8 million or 2.4% of sales, down from $9 million or 4.4% of sales for the same period last year. This decrease is mainly explained by the lower volume of rebates due to the inventory optimization, a one-time charge as well as a lower sales volume, mainly attributable to COVID-19. These factors were partially offset by the savings from the optimization of processes and integration initiatives.While our short-term focus will be managing through the current COVID-19 crisis, our long-term objective remains the same. We expect to capitalize on the transformation undertaken in 2019 while continuing to adjust our cost to serve model to new market realities. We are a clear market leader. We have the ability to scale into existing and new markets. We intend to accomplish this by focusing on each of our paint segments, mainly premium, industrial and value segments, along with our associated products. We will also benefit from the full deployment and impact of the PIP, and will continue our journey towards a continuous improvement culture. Now let's turn to Page 7 for Canada. Sales for the first quarter decreased 3.7%, mainly due to the negative organic growth primarily related to COVID-19 and the depreciation of the Canadian currency. These factors were partially offset by the additional billing day in the business acquisition. Organic growth was negative 4.9% in the quarter. However, excluding the impact of COVID-19, estimated at approximately 3.5% to 4%, organic growth would have been negative 1%. This decline is related to the timing of PBE products to our independent members on a year-over-year basis. The continued improvement -- performance of our corporate store network partially counterbalanced this situation. In the quarter, we continued to execute the PIP with the integration of 1 store, while we acquired Bay Auto & Truck in Ontario, adding 3 stores to our store network, ending the quarter with 77 stores. Our adjusted earnings before tax decreased to a loss of $2.6 million from a profit of $3.5 million last year. The decrease is mainly explained by a lower onetime volume rebates, unfavorable variation in FX and the positive contribution from ProColor last year. These factors were partially, again, offset by the PIP. While our short-term focus will be managing through the COVID-19 crisis, as mentioned before, we will continue to increase operational efficiency in building our independent members' market share while driving new BUMPER TO BUMPER auto service banner program to increase loyalty to our network.For Parts Alliance, just turn to Page 8, please. Sales for the first quarter decreased 5.7%, mainly due to the negative organic growth related to the COVID-19 impact, the weakening of the British pound and the expected revenue decrease from the integration of 13 company-owned stores in the last 12 months. Organic growth was negative 4.5% in the quarter. However, excluding the COVID impact estimated at approximately 5.5% to 6%, organic growth would have been positive. Our recent greenfields continue to be positive to our overall sales results as well.In the quarter, we integrated 3 stores, ending the quarter with 176 stores in our network. Our adjusted earnings before tax decreased to a loss of $300,000 from a profit of $2.3 million last year, mainly explained by the lower gross margin due to the different product mix, lower volume rebates and lesser absorption of fixed costs. Last year, TPA also benefited from a gain of a property disposal, which was not repeated this year. These factors were partially offset by the savings from the PIP and the benefit of the government subsidies related to COVID-19.Our objective will be to focus on capturing the full benefits of our recent investments. We will continue to optimize our supply chain and to complete the integration of our ERP systems.With this, I will now turn it over to Eric to review our financials.

[Eric Bussieres, Executive VP & CFO]

Thank you, Brent, and good morning. Please turn to Page 13 for consolidated profits. For the first quarter, we reported a loss of $6.7 million or $0.16 per share versus a loss of $1.3 million or $0.03 per share last year. Adjusted earnings for the quarter were a loss of 40 -- $4.3 million or $0.10 per share versus a profit of $5.1 million or $0.12 per share last year. The decrease in adjusted earnings was mainly attributable to lower adjusted earnings before tax and the difference in the tax rates from foreign jurisdictions as well as the different geographic distribution of taxable earnings and losses.Now let me comment on our cash flow on Page 14. Recall that typically we burn cash in our first quarter. We used $10.8 million of cash flow from operating activities in the first quarter of 2020 versus $69.5 million last year. This marked improvement was mainly due to our proactive cash management in the face of COVID. More specifically, we optimized our inventory in FinishMaster, which improved our working capital by about $44 million year-over-year.In addition, with the emphasis on the collection of receivables, we improved our working capital by another $20 million year-over-year. This cash inflow were partly offset by lower operating results. Combined with additional borrowing under our credit facility, we used our liquidity, in large part, to fund our working capital, make a tuck-in acquisition in Canada, invest in CapEx and merchant advances as well as pay dividends. Note that we did temporarily suspend future dividends in order to preserve cash to weather the current crisis.We generated $11.8 million of free cash flow from the quarter compared to $19.2 million last year. This variation is primarily due to lower volume rebates associated with the optimization of inventory.Turning to Page 15. As of March 31, 2020, our outstanding total net debt stood at $468 million, including $96 million of IFRS lease obligations versus $449 million and $101 million, respectively, 3 months earlier. When you exclude IFRS 16 lease obligation, total debt to adjusted EBITDA stood at 3.15x versus 3.63x for the same period last year.As of the end of March, we were in compliance with our financial agreements. Based on our assumptions, we believe that our current liquidity and positive cash flow in future periods will be sufficient to meet our current operating and capital needs. Let me provide more color on this in a moment.Turning to Page 16 for the outlook. There is significant uncertainty in the market, but we are working on the assumption that this will last through a good part of Q2, with demand progressively recovering in Q3 and, hopefully, return to prior levels sometime in 2021. In fact, April consolidated sales contracted by approximately 50%. As of end of April, we had reduced our payroll cost by approximately 50%. We undertook temporary and significant cost reduction actions, which can be grouped under 3 categories: personnel-related actions; adjustment to variable costs, which mirrored the lower projected revenue; and elimination of discretionary spending combined with a significant reduction in capital investment initiatives.We have a certain fixed cost base, including facility rents, administrative expenses and interest expense that are harder to compress. We are and we will continue to focus on preserving cash in this period of reduced demand. Currently, on the bright side, we are able to gradually reopen our closed stores in all 3 segments as market conditions are allowing. Therefore, we start to bring back some of our workforce, changing store hours and adjusting payroll. We are seeing this as a positive first step to a gradual return to a new normal.In fact, day by day and week by week, sales trends are showing stabilization and, in some cases, early signs of improvements. In the first few days of May, sales marginally improved compared with what we have experienced in April as the various economies start reopening, for example, in The Maritimes and in the province of Québec.Although we are starting to see some encouraging signs, these remain significant uncertainty going forward from the impact of the pandemic, and the related financial impact is difficult to estimate or predict at this time. However, let me provide you with a bit of color on the limited visibility we have. As of Tuesday, May 12, Uni-Select had access to approximately $110 million on its credit facility following liquidity preservation efforts taken in the context of COVID-19 pandemic. In addition, should the pandemic extend longer than current expectations, we have initiated and are in advanced stage of discussion with certain existing lenders and governmental institutions to refinance certain debt with a view to preserving and increasing our available liquidity.If we realize our refinancing strategy, as anticipated, our total access to liquidity would increase by an additional $100 million to $210 million on a pro forma basis as of May 12, 2020. Therefore, we are confident that we have a solid financial plan to address the current price and sufficient liquidity to meet our current operating and capital needs. This completes the financial review of the first quarter.I'll now turn the call back to Brent.

[Brent Windom, President, CEO & Director]

Thank you, Eric. In conclusion, the actions taken during the crisis will provide a safe and solid foundation as we return to the new normal for all of us. The team continues to act on a number of fronts to address the new market realities as they are happening. We are confident that these actions, including the ones to enhance our liquidity, that we would be in a situation not only to weather the crisis but emerge in a positive position. I would like to thank each of the 6,000-plus team members again for their commitment to adapt and to execute, especially since the onset of COVID-19. I would also like to thank our shareholders for their support and their guidance in these unprecedented times.This concludes our presentation. We're now ready for your questions. So Julie, if you will, please?

[Operator]

[Operator Instructions] Your first question comes from the line of Benoit Poirier with Desjardins.

[Benoit Poirier]

If we look at the impact of COVID-19, could you talk about if there's any particular region that are more or less impacted by the pandemic?

[Brent Windom, President, CEO & Director]

Look, Benoit, it varies so much. It's week by week, different markets, depending on the government actions, depending on reoperating this section. Just think about Québec, right, for instance, where the various economies from a regional standpoint are not moving in the same pace. So there's a wide range here. And I wouldn't want to put color more so than anything else. I will tell you that on a global basis, we saw sales reducing by about 50% in the month of April. And as I said in my allocation, this is a positive sign versus May in the sense that we're seeing May improving over April slightly. And as the markets will reopen, we think that the revenue will follow.

[Benoit Poirier]

Okay. Perfect. And when we look at the cost reduction initiative, you've already taken some action with some furloughs, some salary cut, reduced hour. So -- and if we look in the past, you've been quite good with the PIP program in order to improve margin. So could you talk a little bit about the overall PIP that could be announced to improve costs? And in terms of EBITDA also, what type of margin we might be looking at given the significant reduction in sales?

[Brent Windom, President, CEO & Director]

Yes. So look, I think it would be premature for us to indicate in any shape or form the overall impact at this point. I think that if anybody has a crystal ball to tell me how quickly each economy will reopen, then there will be an easier conversation and I will follow those leads. So I think I can only manage what we control. And I think we've done a very -- I'm personally very pleased with what the teams have done in the last 60 days. It's a very different world right now up there, and we're certainly managing our affairs to make sure that we have reduced costs in a significant manner. The reality is we'll bring people back as revenue comes back. And we got to adjust that on a -- it's a daily adjustment. I can tell you, from a store perspective, we tailor and adjust workforce on a daily basis across our organization. So that's the extent of the color I can give at this point, Benoit.

[Benoit Poirier]

Okay. And in terms of working cap, there was some consumption, which is typical in Q1, big improvement versus last year. But if we look at the full year in 2020, could you walk us through the assumption action that you are taking and whether you should consume working cap or improve working cap given the different discussion you have with, let's say, the suppliers or your clients?

[Brent Windom, President, CEO & Director]

So I will tell you, Benoit. The way you should think about our working cap is in 2-side sequence, the first half of 2020 and the second half of 2020. Due to the buying patterns of 2019, we have more payables to be paid in the first half of 2020 versus the second half of 2020. And this is just on normalized volume. I just want to make sure, in other words, it's not a straight line in our purchase behavior of 2019 and, therefore, there's a higher impact on working cap in the first half versus the second half. And as not -- as usual, right, at Uni-Select, Q1 tends to be a weak quarter from a cash flow perspective. That's no different this year. And COVID is a minute explanation of that for Q1. However, COVID will have an impact on our Q2 working capital, right? Just think about sales contraction and the fact that you're not going to collect as many dollars from the sale that you would have done otherwise. So in normal cases, I would have told you, first half, we're going to burn cash, second half, we have generated cash. It's difficult for me to say how Q3 will shape up and Q4, right? But we are certainly taking significant measures to manage our cash flow activity.

[Benoit Poirier]

Okay. And now if -- one last question on the liquidity front. Obviously, you're having discussion with the lenders, the government levels. You seem confident to get another $100 million increase in terms of credit facility. Could you talk a little bit about the covenants? And when we look at Q2, Q3, Q4, obviously, with an EBITDA reduction, it seems that the leverage ratio is going to increase significantly versus the last 2 quarters. So I just want to get more color about what type of ratios, whether there -- you expect to receive some waivers and the flexibility you have around that.

[Brent Windom, President, CEO & Director]

So look, we're progressing well in our discussions with the group of lenders. I think everybody is very realistic in the market with what's going on that, to your point, the EBITDA measures will be impacted. And I can assure you that in our various discussions with the lenders, we're addressing that point also. I will, and we will, bring more color to this once the financing is closed. I do not want to speculate on the final outcome of the financing at this point. But I can tell you that it's been worked on and on the basis to ensure that there is flexibility for the company in view of the current economic context.

[Operator]

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

[Jonathan Lamers, Analyst]

Eric, could you please clarify a comment that you made in your prepared remarks? I believe you said something along the lines that the current credit facilities will meet needs for the foreseeable future. Does that comment include the proposed refinancing or exclude that?

[Eric Bussieres, Executive VP & CFO]

If I exclude the proposed refinancing based on what we see today, we believe that we have the required margin. The reason why we're going ahead with a restructuring and refinancing, so to speak, is essentially, nobody has visibility on how long this uncertainty and that period will last. So we want to make sure that we have the proper flexibility over the coming months in the case that this crisis is longer than anticipated.

[Jonathan Lamers, Analyst]

Okay. And when you say that if you exclude it, you believe it's adequate, that would be under the assumptions that you've laid out on Slide 16. Is that about -- is that fair to say?

[Eric Bussieres, Executive VP & CFO]

Slide 16. Yes. Yes, I guess.

[Jonathan Lamers, Analyst]

Okay. And can you tell us who the government institution is that you're speaking to and what program it is you're looking to access?

[Eric Bussieres, Executive VP & CFO]

We'll provide more color once the transaction is finalized and agreed on.

[Jonathan Lamers, Analyst]

Okay. Thinking about a breakeven level of sales, do you have an estimate for where that would be to help us set reasonable estimates?

[Eric Bussieres, Executive VP & CFO]

Well, look, it's a very dynamic element, Jonathan. I think what I can indicate is that if we are able to generate a result similar to the April results, we believe that we would be at least EBITDA neutral on that basis. But that's -- there's so many things, so many moving parts. And I would say it's a range of, depending on the revenue and how quickly those revenues are coming back.

[Jonathan Lamers, Analyst]

Okay. Are you in a position to walk us through your expense categories? What portion -- where fixed expenses would be now or where they were before the salary adjustments and what portions would vary with lower sales?

[Eric Bussieres, Executive VP & CFO]

Well, look, I think the payroll contraction, as we indicated in our remarks, is about 50% year-over-year, April to April. So it gives you an idea of the flex that we were able to do on the payroll side. On the -- there is some unusual items in our Q1, right? There's the FX loss and the one-time impact that we mentioned. And those, if you remove those, then you get into a level of expense for the current volume that range on a quarterly basis between $28 million and $30 million. If you normalize this for those type of one-time and then you have your interest expense, that would tell you that we'll be ranging between -- in the $20 million -- low $20 million range is my expectation at this point.

[Jonathan Lamers, Analyst]

Okay. And how are the paint manufacturers?

[Eric Bussieres, Executive VP & CFO]

Sorry, Jonathan -- sorry, I apologize. I said $20 million of interest expense in the quarter, I meant that's the annual number. So there's a bit of a difference. I apologize. This would be more like a $7 million expense for the quarter.

[Jonathan Lamers, Analyst]

Okay. Brent, how are the paint manufacturers responding to COVID in terms of the relationship with you and the other distributors? What are they communicating? And are there any opportunities for you to access any support? Or conversely, are there any penalties we should be thinking about?

[Brent Windom, President, CEO & Director]

So I would just say, we've been in constant conversation with all of our key partners, supply partners, both on the parts and paints, as you can imagine. Certainly on the paint side, we're very, very integral with them. It is a good relationship. It is one that's been very dynamic, very open, and very transparent. They're very supportive of everything we're doing, and we're very aware of what they're doing in their supply chain. They're all facing 50% to 70% reductions in volumes. So quite frankly, we're working with them to make sure that when we come out of this together, that we're in lockstep with -- so we can grow.

[Jonathan Lamers, Analyst]

Okay. And Eric, regarding inventory and purchases, can you comment on how much you've slowed purchases over Q2 and describe any opportunities you see to sell down inventory to shore up the free cash flow?

[Eric Bussieres, Executive VP & CFO]

Well, I mean if you look at what we've achieved just in Q1, I think it's a significant destocking that we realize, and we are certainly working on the basis that we reduce purchases significantly in the second quarter. Look, the reality, Jonathan, is we had a sort of a target number of reducing inventory by approximately $100 million compared to December 31, 2019. In my opinion, we'll exceed that number slightly. But what's important to understand is, at some point, you've got to maintain your fill rates. In distribution, you can only sell what you have. If you don't have it, you lose the sale. So fill rates have to be an element that we maintain, and we will. Obviously, there's been significant reduction in volume. Therefore, you're not burning through your inventory at the same speed than you were before, plus the fact that you reduced purchases on that basis, but we further reduce our purchases to destock where we can and where it makes sense. The 3 businesses have targets to do so. And I will tell you that based on Q1 and what I'm seeing so far, we're tracking to our plan.

[Brent Windom, President, CEO & Director]

And that's across all 3 businesses.

[Operator]

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

[Brent Windom, President, CEO & Director]

Thank you very much for joining us today, and we look forward to talking to you at our next quarter results. Thank you, and have a good day. Stay safe.

[Operator]

This concludes today's conference call. you may now disconnect.