Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience, but dumps and make sure that culture at all social GE leases people did BTB I don't see <unk> specialty message on the shelf.
[laughter].
[laughter].
[laughter] they've done zumiez you'd be if your local fabulous do need silicon is it does just was mtell truly about sponsel download movie I pull up his aren't that she only onset shown to guess you'll pull them out didn't get CR p.. So late <unk> or <unk> dollars you study <unk> industries.
<unk> Sue.
Hey, Twilight zone shouldn't make not let's see that battle and as we should know shifted led to like shown does that files you had zick, ladies and gentlemen, thank you for standing by and welcome to do you need silica third quarter results.
At this time all participants are no listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance to press star Zero I would like now to hand, the conference over to your.
Speaker today, we as you know.
Chief Executive Chief Legal officer. Thank you Ms. you know please go ahead.
Thank you do see good morning, everyone and thank you.
Joining me on 40 units select third quarter conference call presenting this morning, our brands when the president and CEO of Uni select.
And president and CEO of Canadian Automotive group.
And any piece, yes, 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 any select dotcom, India investors section.
As noted on slide two I would like to remind you.
About the caution regarding forward looking statements, which is applied to our presentation and comments.
All amounts our experience in us dollars, except as otherwise specified.
As noted on slide three recall that on January Onest 2019, The corporation applied for the first time.
As far as 16 leases.
Using the modified.
With respect to transition approach that did not restate comparative amounts of the year prior to its adoption as permitted.
As a result that 2019 need to income then.
Consolidated financial statements present significant variances.
When compared to 2018.
Furthermore, with the adoption of higher for 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 filings.
Yes.
On the interest expense on leases liability and a higher depreciation link to the right to use those assets.
As a result, we consider the earnings before tax as the peripheral comparative measure to.
To explain our result and performance. Please refer to de adoption of I referred to 16 leases section in the of the any for further details.
With that let me turn to go over to Brent.
Good morning, thank everyone for joining us.
Please turn to page five.
We'll review our third quarter results, but before I begin I would like to thank each of our 6000 plus team members for their dedication to our customers into the improvement our business. We're pleased with our continued efforts and the execution our of our performance improvement plan and all three business segments.
Over the past year, and and since I became CEO of units like we've taken concrete steps to navigate through headwinds stabilizing the business were required in 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 UK.
Owning greenfield stores in both UK in 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.
Finished masters profitability continually improved on a sequential basis as the adjusted earnings before tax increased by 70 basis points.
In the UK, while our business faced a prolonged uncertainty surrounding Brexit the cost saving cost saving initiatives recently put in place started the impact our third quarter with Mark profitability improvement of 330 basis points.
And well and will materialize in a more meaningful way in the fourth quarter, while the Canadian automotive group continued its momentum this growth momentum and increased profitability.
In the quarter, we integrated eight more stores and in the quarter with 446 stores and generated additional 13.2 million for a total of 42.4 million an annualized savings since we launched the poor performance improvement plan.
And 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% CAGR and given the softness of the refinish market finished master was slightly negative Ta was negative 2.6 due to the micro economic.
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 challenging conditions at finish master mtpa 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 IRS 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 six for update on the pill.
Following the end up the analysis of the operations in the cost structure of TCPA during the quarter, we identify complimentary areas of action.
Additionally, certain initiatives inside the CAG will allow us to further optimize and supply chain. These two 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 pill are now expected to increase from $45 million to 50 million by the end of 2020.
Which more than 80% or $42.4 million have been realized by the end of September .
At the end of the second quarter, we set our savings will would reach 45 million and the associated restructuring costs of 20.5 million will be completed by the end of the physical 2019 and that is still the case as it relates to 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 2020.
Please turn to page seven.
The review of the strategic alternatives as following this course as indicated on the outside 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 a corporation does not intend provide further updates until such time the board approved.
A definitive transaction, a strategic alternative or otherwise determines further disclosure as appropriate.
There is no guarantees that a review of the strategic alternatives will review will result in a transaction or transactions undertaken of its terms or timing.
Now, let's turn to the business on page eight please.
Sales for the third quarter finished master 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 pill with the integration of eight stores, increasing the total of 20 to 22 stores year to date.
The integration process of stores as 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 decreases as a result of their evolving customer mix and pricing pressure.
Partially offset by the savings of the performance improvement plan.
On October 25th we announced the appointment of Rob Molenaar as the interim President and COO finish master following the resignation of Chris Adams. Mr. Molnar has been instrumental in the development and execution of the pill for finished master he has significant industry specific restructured expertise, including a deep knowledge of the automotive refinish space.
Pace 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 nine for Canada.
And 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 with somewhat offset by.
The time.
Timing of the sales of PV.
In the quarter, we continued the integration of our latest acquisition auto auto choice parts and paint 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 the it'd be a positive addition to our network.
Our adjusted earnings before tax reached 6.9 million or 5.1% ourselves 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 are pip initiatives and partially offset by FX.
At the end of the quarter, we sold pro color banner program for a net gain of $19.4 million. We will continue to support the pro Golar banner with a long term supply agreement. This transaction had no operational impact on the quarter as it was completed on September Thirtyth.
Going forward on an annual basis.
It will have no impact on ourselves and less than 2.5 and impact on the profitability of which about one third is expected to be offset overtime.
Let's turn to page 10 please.
In the UK and constant currency ourselves 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 has impacted by the prolong the effect of Brexit.
And if you exclude.
The loss sales contract.
From the fourth quarter last year organic sales were marginally down for the quarter.
Also bear in mind that we were also up against a very strong comparable quarter last year, where we generated organic growth of 9.4%. Having said. This it is important I understand that the long term fundamentals of the UK autoparts aftermarket remain sound.
Recall that since we acquired TCPA, we have opened 18 Greenfields and expect opened two in the fourth quarter. This year for a total of five 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 of 4.2% of sales last year. This decrease is primarily due to lower sales volume recent investment in greenfield and being partially offset by the segments of the pill.
Our initiatives will not only benefit us in the short term, but they will position us positioned the business positive for the as a market recovers.
As mentioned PPH results were a marked improvement of 330 basis points of profitability on 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 an 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 complete financial review, Eric. Thank you Brett good morning.
Please turn to page 13 for a brief brief overview of pro forma David.
With the IR for 16, it becomes difficult to compare our 2019 adjusted EBITDA last year.
Consequently, we provide pro forma adjusted EBITDA to helped the understanding of our results on a pro forma basis. The adjusted EBITDA for us in the third quarter of 2019 would ask stood at $30.3 million down 13%, that's compared to 34.9 million last year for the same reason mentioned vibrant earlier.
Please turn to page 15 for consolidated profits.
For the third quarter, we reported net earnings of 24.6 million or 58 cents per share versus net earnings of 10.6 million or 25 cents per share last year, mainly due to the net gain on the sales of four called.
Adjusted earnings for the quarter totaled 10.7 million or 25 cents per share versus $15.5 billion or 37 cents per share last year. The decrease in adjusted earnings was mainly attributable to lower adjusted earnings before taxes.
Now, let me comment on our cash on page 16.
And as Curt third quarter of 2019 National provided by operating entities 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 we as a result, we generated 30.3 million of free cash flow for the quarter compared to 36.9 last year. This variance is explained by 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 a onetime charge of payment terms change of payment terms of 55 billion from one 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 to as of 2018 once you adjust.
The onetime payment.
Finally, two data board of director declared dividend of 9.25 cents per share payable on January 21, 2022 shareholders of record as of December 31090.
This represents a dividend yield of 3.4% at Yesterdays closing price.
Turning to page 18.
As at September Thirtyth 2019, our upsetting total net debt stood at 530 million, including $104 million at lease obligation.
Similar to our net debt position and of Q2.
In the fourth quarter, we will manage our cash flow with the expectation that our debt level would remain similar to 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 property matrix to be in the lower part of the range or slightly below.
This completes the financial review of the third quarter I will now during the call effective breadth to conclude.
Thanks, Eric.
In summary during the past year, we've 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 Montreal, we acquired all choice, which added a solid 17 store business, we continue to grow our independent our loyal and depend.
Members.
And CPA in the past year, we've we've opened strategic six strategically placed greenfields acquired three stores in Ireland, expanding our coverage in the UK. We also opened a new national distribution center situated in the heart of the UK, which will allow us to the ability to grow while improving our efficiency.
Finished master we're proud of what we achieved with our appeal plan. So far we continue to optimize our footprint with marginal impacts to ourselves.
While we are doing that we have been reviewing our distribution models to ensure that we provide most efficient methods to serve our customers.
We are building.
We are building for the long term.
For the balance of the year, we will continue to execute our plan to build on the solid improvements in each of the three 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.
Thanks.
A reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound or Heskey. Please standby well, we compile the Q and a roster thoughtful demanding guess John .
Our focus today, but I guess you want to units so we'll take questions.
Good luck on to that sounded just.
Your next question. Your first question comes from venue for your line is open.
Good morning Gen Lemon.
Could you talk a little bit about which key markets do you see some challenges Brent more specifically in give maybe some more color.
And as far as it regards the finished master business.
It's been more in the I would say, the southern California, California markets, the Western region for us as a whole.
And really the other key market would be that the UK.
Okay and any reason why he did there are some softness in those regions as it related to the hurricane a break santoro any more granularity.
Well I would say that as far as the UK I think if theres enough.
Noise and enough clarity around that market.
With what we're facing from a from an economic point of view.
With Brexit certainly in California has had a tremendous amount of.
Competitive pressure for the last probably 18 to 24 months.
Okay, and with respect to the 5 million of additional savings 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 positive impact on the margin or it's mostly to offset.
Softness we see in the those markets these days.
Although I'd say, it's hard for us to predict how the market will behave in the next six months or so right. So obviously, we're focusing on controlling our costs and managing our costs accordingly.
It certainly our hope of management that some of those.
Hurts will result in to a positive contribution to the earnings.
Having said that it's pretty good also on all the topline the ball.
Okay.
Okay, and with respect to do that Pip there wasn't to 20 Bips improvement year over year launch was in Q2 2018 Sheesh is it fair to expect the contribution to strengthen going forward and what magnitude should we expect on a year over year basis.
Well look as I said, it's it's a matter of how the topline will evolve in the gross margin right.
The good news for us as we see some stabilization on the margins, we see actually some increase in the margins no I think TP speaks as 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 action. It takes a bit of time before the action starts showing himself in actual.
Costs and Thats, what were seeing right. So we're very very pleased with the results to date and Theres nothing that tells us that they will not be continuing to be the case going forward.
From what we control.
Okay and looking at your balance sheet. It could you provide some color in terms of free cash flow expectation should we expect the number to be comparable to Q4 2018 or the net debt to EBITDA to be more comparable to Q3.
So our expectation going away as I said the into speech was that we expected that 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, where do 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 at one time $55 million working capital reversal linked to the onetime payment of eight supply not to supply chain story with the payment terms changes. So if you Nick.
To realize this you'll see that our cash was actually will will be very similar to cash what 2018.
Okay, perfect and given the.
Ongoing strategy review could you maybe mention the your ability to to retain employees and the current environment.
Yes, I would answer that.
As I said earlier, the over 6000 employees and team members, we have across the three business units.
Fully engaged our leadership teams are executing the plan that's why we're seeing the benefits we are.
And certainly our current and the growth in our customers as well so I'm not.
No concerns with that at this point.
Okay. Thanks, Thanks weren't if I.
Thank you Bill.
Again, if you'd like to ask a question press star one on your telephone.
At this time there are no further questions I turn the call back over to the presenters.
Thank you this morning for joining us and thank you for listening to our Q3 results. We look forward to update you on the progress with our next call and we'll talk to you soon thank you very much.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect modems in issue Nacco, Phil said Jemini method of off that we.
We may now disconnect.
No.