Uni-Select Inc

TSX:UNS

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to Uni-Select Inc.'s 2022 First Quarter Results Conference Call. [Operator Instructions] [Foreign Language]

I would now like to turn the conference over to Max Rogan, Chief Legal Officer and Corporate Secretary. Please go ahead.

[Max Rogan, executive]

Thank you. Good morning, everyone, and thank you for joining us for Uni-Select's first quarter conference call. Presenting this morning are Brian McManus, Executive Chair and CEO of Uni-Select and Anthony Pagano, 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 applies 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 Brian.

[Brian McManus, executive]

Thank you, Max. Good morning, everyone, and thank you for joining us for our first quarter results conference call. Please turn to Slide 4 for the key highlights of the first quarter. We are pleased with our first quarter performance. We had a strong start to the year with sales increasing as market tailwinds improved demand, and we saw price increases above historical levels. We also benefited from the operational improvements implemented by our team over the past several quarters, and favorable timing and reconciliation of vendor rebates.

Turning to our results. Consolidated sales for the first quarter were up 11% to $410 million from $370 million last year, primarily attributable to organic growth of 11.6%. In turn, adjusted EBITDA increased over 50% to $45 million or a margin of 11% compared to $30 million or a margin of 8.1% last year, representing an increase of 290 basis points. This performance was largely driven by higher sales, additional vendor rebates in all segments and a streamlined cost structure. These factors were partially offset by our higher operating expenses related to inflationary fuel and energy costs as well as the cost impact of a fully operational business.

As a result of higher adjusted EBITDA and significantly lower financing expenses, our diluted adjusted net earnings per share reached $0.43 per share versus $0.12 per share last year. While our first quarter performance was very strong, we caution that the magnitude of improvement will likely be greater in the first half of the year due to the timing of certain rebates and as we begin to lap operational improvements implemented in the back half of 2021.

Furthermore, although we do expect to leverage further operational and market opportunities going forward, including potential strategic acquisition opportunities, we still need to contend with ongoing supply chain challenges, labor issues and inflationary pressures. I will now turn the call over to Anthony to complete the financial review. Anthony?

[Anthony Pagano, executive]

Thank you, Brian. I will direct participants to Page 6. Before I discuss the results from our 3 segments, I would like to touch upon 2 one-time items that negatively impacted EBITDA by about $12 million in the first quarter, both of which have been excluded from the calculation of adjusted EBITDA. The first relates to inventory obsolescence. As you recall, in Q2 of last year we took a large charge associated with the change in inventory provision assumptions at our FinishMaster segment.

During Q1 of this year, we conducted similar work regarding our inventory provision methodologies at CAG and their underlying assumptions. As a result of this, a one-time obsolescence expense of $10.9 million was recognized in the quarter. We also recognized a $1.2 million expense for various items, including restructuring charges relating to the rebranding of GSF and other special items. Having taking these 2 charges in Q1, we anticipate that the bulk of one-time charges for 2022 have been completed.

Turning now to Page 7 for FinishMaster. Both sales and organic growth increased 9.2% to $173 million, driven by a general recovery in the market and the effect of price increases. Adjusted EBITDA also continued to improve, reaching $19.6 million or a margin of 11.3% compared to $10.1 million or a margin of 6.4% for the same period last year. This significant improvement was primarily driven by additional sales volume and rebates, as well as an optimized cost structure which is testament to operational initiatives taking hold. Our focus remains on ramping up sales, optimizing our path to market and further leveraging technology to develop our operating model.

Turning to Page 8 for the Canadian Automotive Group. Sales reached $130 million, up 12.7% from $115 million last year, mainly attributable to strong organic growth driven by increased demand and price increases. We have been pleased by our ability to grow sales despite continued supply chain constraints across certain product categories. Adjusted EBITDA reached $17.2 million or a margin of 13.2%, up from $12 million or a margin of 10.5% for the same period last year. This increase is mainly due to improved demand, additional vendor rebates, price increases and product mix. Note that during the first quarter we completed the acquisition of 3 stores from one of our members in Quebec.

Turning to Page 9 for GSF. Sales reached $107 million, an increase of 10.7% from $97 million for the same period last year. This growth was mainly attributable to organic growth of 14.8%, driven by demand and price increases, and partially offset by the negative effect of currency conversion. Adjusted EBITDA reached $10.9 million or a margin of 10.2%, up from $10 million or a margin of 10.3% last year. This growth is due to additional sales volume, higher vendor rebates and an optimized cost structure. It was partially offset by government subsidies recorded in 2021 and higher operating expenses relating to inflationary fuel and energy costs, as well as a growing network of stores. In the quarter, we opened 2 greenfield stores and we expect to invest in additional openings in 2022, in line with our growth strategy.

In summary, we are pleased with the operational results across all 3 of our businesses and are encouraged by the growing list of opportunities for ongoing improvements and sales initiatives that will be executed going forward.

Turning to Page 11 for comments relating to our cash flow. We generated $8 million of cash flow from operations in the first quarter compared to a small cash outflow in the same period last year. This variance is primarily attributable to increased profitability and lower interest payments, given our amended credit facility. It was partially offset by higher working capital investments due to typical seasonality and additional inventory purchases to mitigate supply chain delays.

After accounting for net investments in merchant advances as well as capital investments, we generated free cash flow of $2 million in the first quarter, up from outflows of $6 million for the same period last year. This is primarily driven by higher cash flow from operations combined with higher CapEx, including the opening of stores at GSF and software development to support productivity and sales initiatives. Note that customer investments were lower than the same period last year due to timing.

Turning to our financial position on Page 12. At the end of Q1, our total net debt stood at $327 million, including $104 million of IFRS 16 Lease obligations related to buildings. This represents an increase of $18 million versus $309 million at the end of the fourth quarter. Although our total net debt was higher, our leverage ratio decreased further to 2x at the end of Q1 from 2.1x at the end of last year, driven by our higher adjusted EBITDA. This leverage represents the lowest since the acquisition of GSF in 2017.

In addition, at the end of the quarter we had $174 million of available liquidity subject to compliance with financial covenants. We continue to be highly focused on driving asset utilization, including working capital in order to drive stronger returns for our shareholders. I will now turn the call over to Brian for concluding remarks. Brian?

[Brian McManus, executive]

Thank you, Anthony. Please turn to Slide 14. Our views on 2022 have not changed since last quarter. Based on what we currently see, we still expect modest improvement in sales and higher adjusted EBITDA and diluted adjusted net earnings per share in 2022 compared to 2021. As I mentioned in my opening remarks, the magnitude of improvement will be greater in the first half of the year due to the timing of certain rebates and as we begin to lap certain operational improvements implemented in the back half of 2021.

Having said this, we remain cautiously optimistic about 2022 as we face ongoing headwinds with regards to our supply chain and labor. We expect continued challenges with fill rates, inflationary pressures on labor and labor availability. While our team continues to do a great job managing through these, we expect it will become increasingly challenging going forward.

Our priorities for 2022 will be to continue to focus on organic growth and drive operational improvements across each business unit. Making use of our improved balance sheet, we intend to reinvest in the business through increased CapEx and customer investments, and begin to consider strategic acquisition opportunities to further expand and consolidate our market position.

To conclude, we are well positioned to drive the business to the next level, given the global market recovery, our healthy balance sheet and the dedication of our team. This concludes our presentation. We are now ready to answer any questions. Operator?

[Operator]

[Operator Instructions] The first question comes from Nauman Satti with Laurentian Bank.

[Nauman Satti, analyst]

So my first question is more on the timings of vendor rebate. I think you guys benefited in the last quarter from that and this quarter as well. How should we expect that in the second half because in your outlook comments as well, it appears that the first half would be better than the second half. Is that the right way to think?

[Brian McManus, executive]

I think the best way for you to think about this as you consider the balance of the year. And similar to what I mentioned in the last quarter is to look at the last 12 months or rolling 12 months on average, and that should get you to about the right place as we consider the full year 2022.

[Nauman Satti, analyst]

And I think in your prepared remarks, Anthony, you mentioned that the focus is on sales increase. Some of that is natural sort of recovery from COVID. But is there anything else that you guys are doing to increase sales? Any new initiatives or it's just -- you're just benefiting from the natural volume rebound?

[Anthony Pagano, executive]

Naturally, we're focused on driving sales in all of our divisions. I think in the prepared remarks I was referring directly to FinishMaster, if I recall correctly. I think that we do have -- we do expect to benefit somewhat from a recovery in the market, but we have implemented a variety of initiatives, both in terms of sort of our team and incentivizing them. Yes, that's kind of what I had in mind.

[Nauman Satti, analyst]

And do you see any changes in the customer mix, like getting some customers because of these ongoing probably supply chain challenges and once things normalize, they can probably go back to different suppliers? Or has anything changed in that within the customer mix recently?

[Brian McManus, executive]

It's Brian speaking. Not so much from the client mix. I think on the supplier side, we are looking to other suppliers to help fill where we may have shortages. But on the customer mix, for the most part it would be similar. There has been opportunities where we're able to fill in for a competitor that may not have what a particular customer is looking for, but I would say it probably goes the other way sometimes for us. So in general, it's fairly stable.

[Nauman Satti, analyst]

I think you guys were also benefiting a little bit from the change in product mix from private labels. Was that something in the first quarter as well?

[Brian McManus, executive]

Yes. It's something we continue to focus on, and we've made progress.

[Nauman Satti, analyst]

Congrats on a good quarter.

[Operator]

Your next question comes from David Ocampo with Cormark Securities.

[David Ocampo, analyst]

I just wanted to circle back quickly on the private label stuff. I know the supply chain issues has tilted the mix a little bit more towards private label. But as we begin to normalize maybe in the back half of the year or maybe even 2023, do you think that mix shifts back? Or just curious how sticky your private label business is? I think do the customers just shift back in a normal environment?

[Anthony Pagano, executive]

It's hard to predict with 100% the future, but I think what we are seeing is a fairly good uptake by our clients. There seems to be some stickiness to it. I think they're seeing the value in it. And part of it also the increase in private brands is just the categories of products that we're also carrying it in. So we've expanded beyond just certain categories. So the mix has increased as well.

[David Ocampo, analyst]

And Anthony, I don't know if you can comment on this, but I mean it's pretty good organic growth across the board in all 3 of your divisions. I was wondering if you could break that down, if you can, between volumes and price increases. Is it more tilted towards price increases versus volumes?

[Anthony Pagano, executive]

Yes, that's fair. I think it would be -- yes, a bit more tilted towards price increases than volumes. And as you can understand we're not going to break that down for competitive reasons.

[David Ocampo, analyst]

Yes. Completely understand that. And then last one for me on the M&A environment. Is there one particular area where you see more opportunity? And just given all the volatility that we're seeing in the marketplace with multiples coming down, is there a less willingness to sell in the current environment?

[Brian McManus, executive]

I think the best way I can answer that is just to say we're keeping our eyes and ears open in all the business units. And we'll see what lies ahead, but we're confident that this year we will hopefully be able to see a couple of acquisitions.

[Operator]

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

[Jonathan Lamers, analyst]

Maybe picking up on that last question, Brian, could you give us a little bit more color as to how the acquisition pipeline has trended versus the Q4 report in February?

[Brian McManus, executive]

Not really. I would say that it's still -- there's still the pipeline, Jonathan. And we're actively discussing with various parties out there, but that's about as much as I would say.

[Jonathan Lamers, analyst]

Anthony, I know you said that you can't break down the organic comp. But just on FinishMaster, the paint suppliers did see a real step-up in their finished volume trend Q4 to Q1. We didn't really see that with FinishMaster this quarter as far as I can tell. Are the results we're seeing from the paint suppliers the lag? Did the FinishMaster already benefit from that in Q4?

[Anthony Pagano, executive]

I think there is -- I can't comment on the results of our suppliers and we won't. But I think the one thing I would say is there's naturally some differences in timing around when we buy, when our competitors would buy. Behavior is influenced actually by price increases from suppliers because their customers will know to some degree in advance of their price increases coming in. So that tends to drive some volumes. It's certainly something we look at and we consider, but very difficult to deconstruct.

[Jonathan Lamers, analyst]

On paint inflation, is there anything, help us with in terms of timing of when there might be another round of price increases pass through?

[Anthony Pagano, executive]

No, we don't have visibility on that. Those things typically come to the market in one go, Jonathan. So we can't speculate on when the timing of future price increases may or may not happen.

[Jonathan Lamers, analyst]

And just last question on the Auto Parts division, has the parts supply availability gotten worse in recent months?

[Brian McManus, executive]

I would say it hasn't gotten worse, but it also hasn't improved very much. I continue to be very pleased with the work of our team to mitigate around it. But I would say it's pretty much in the same position as we would have been last quarter.

[Jonathan Lamers, analyst]

And just on that, would you say there was any material abnormal benefit from inflation in earnings this quarter that we should be thinking about as we model forward?

[Brian McManus, executive]

There will be a certain amount of benefit. I don't think I would call it material or abnormal though.

[Operator]

Your next question comes from Daryl Young with TD Securities.

[Daryl Young, analyst]

Congrats on a great quarter. Sticking out the inflation theme, but maybe coming out in a slightly different way, we're starting to hear some folks talking about potential for a deflationary environment 12 months out. Is that something that's on your horizon at all at this point or is that still trying to catch up with the current inflationary environment, but maybe just any comments you might have on that longer-term call the threat?

[Brian McManus, executive]

Yes. It's really hard to comment on it, especially in the position we are now, where we're not getting the supply that's coming in. So it's -- I guess, from our standpoint, it's a little hard to imagine a deflationary scenario right now. So probably premature to have any comments on that.

[Daryl Young, analyst]

And if that were to unravel, would that be margin destructive, I guess, would be the way to put it or are there ways to mitigate that in the future?

[Brian McManus, executive]

There'll certainly be ways to mitigate it. I think one of the ways we're already mitigating it, which is part of the reason we don't necessarily see the gains from inflation or as much as you would expect if we had a larger inventory is really we continue to be very focused on working capital. So as we increase our turns of inventory, it reduces your exposure to either upward or downward price movements.

[Daryl Young, analyst]

And then just on the auto parts side, thinking through vehicle pricing, lack of new car inventory, is there any way to kind of quantify how long this could impact you and how much of a benefit you see this being over the next 12, 24 months?

[Brian McManus, executive]

Very difficult. I'd like to think it does create a tailwind for us and that if the people will be hanging on to their cars longer, probably investing into them especially when you see the prices of the used cars in general, that there's an incentive to continue to keep it in good shape. But beyond that, very difficult to predict.

[Operator]

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

[Zachary Evershed, analyst]

Congrats on the quarter. So as paint manufacturers do raise prices, do you see any lag in raising your own prices that might weigh on margins? Or can you pass that through seamlessly?

[Anthony Pagano, executive]

It's -- I think as we've discussed a few times here, Zach, the majority of our pricing to our customers is based off a sort of a manufacturer published rate. It's called jobber in industry jargon. So as the paint manufacturer increases their prices, the jobber rate goes up and our pricing through to our consumer follows concurrently or immediately. So to answer your question more briefly, there will not be a lag.

[Zachary Evershed, analyst]

And then are you comfortable with your inventory levels given the current environment?

[Anthony Pagano, executive]

I think -- as I've said in the prepared remarks, we're really focused on driving asset utilization, naturally being in a position where we -- where we don't want to be in a position where we need to take an inventory write-down again. So the inventory, the working capital ticked up here in Q1. We had mentioned that to the community. It's something we expected. It's been very planned out, a very thoughtful exercise on our side to really build out safety stocks to insulate ourselves over any potential issues with supplier fill rates. And I suspect as the situation stabilizes, that we would be able to continue down our path of optimizing inventory.

[Zachary Evershed, analyst]

And then on M&A, what's the range of sizes you're evaluating?

[Brian McManus, executive]

I think the best answer I can get to that or the only answer I'll provide you is various sizes.

[Zachary Evershed, analyst]

And then last one from me, and sorry to beat a dead horse here, but just to clarify, do you think the current pace of vendor rebates is sustainable or is it more of a temporary restocking tailwind given the safety stock you built?

[Anthony Pagano, executive]

As I mentioned on the first question, Zach, what I would guide you towards is to look at the last 12 months, and that should be a reasonable proxy for the full year.

[Operator]

Your next question comes from Michael Kypreos with Desjardins.

[Michael Kypreos, analyst]

Congrats on the great quarter. My first question would be, when it comes to we see numbers in Europe, GDP numbers come down lately, what do you really see with your exposure in the current environment that the more consumers are holding tight their money?

[Brian McManus, executive]

I would say, through the first quarter, we didn't see much of it. I would say it's something we certainly are aware of, but the team in the U.K. is still doing a good job of maintaining and trying to grow market share. We've also opened some greenfield branches over there that's further expanding our reach into areas we weren't before. So that combined will hopefully mitigate any softer demand in the market.

[Michael Kypreos, analyst]

And just a quick second one on -- have you seen any changes in the labor issues more in North America or is it still seem like last quarter?

[Brian McManus, executive]

Very similar to last quarter. We're working through it and we're managing, but it's still a tough labor market for sure.

[Operator]

Thank you. There are no further questions at this time. Mr. McManus, you may proceed.

[Brian McManus, executive]

Thank you, everyone, for listening. We look forward to updating you on our progress during our next quarterly call. Also, please join us for our virtual AGM today at 1:30 p.m. Details can be found on our website. Have a great day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.